Probability weighting is one of the cornerstones of decision-making theories accommodating gambling preferences. This paper examines its relevance to explaining employee stock option exercise behavior. We characterized the optimal exercise policy for a representative employee with Rank-Dependent...

It is well documented in the empirical literature that employee stock options exercise behavior is driven by economic/rational factors as well as by psychological/behavioral factors. The latter include a set of behavioral biases affecting attitudes towards risk. Perhaps the most comprehensive...

We derive a simple formula for the cost of the ESO to the firm at the grant date under the assumption that the executive has a constant market-to-strike multiple. The market-to-strike multiple is defined as the ratio of the market price on exercise to the strike price of the ESO. The expected...

This paper examines the reliability of option fair value estimates in the presence of transaction costs. The Black Scholes Merton (BSM) framework assumes zero transaction costs and thus might not provide a reasonable approximation in this context. We investigate the model adjustments companies...

We investigate the impact of independent valuation specialists on the downward bias of pre-initial public offering employee stock option valuations. Undervalued stock price estimates underlying firms' option grants produce option valuations that overstate earnings and provide employees with deep...

The usage of performance-vesting (p-v) equity awards to top executives in large U.S. companies has grown from 20 to 70 percent from 1998 to 2012. We measure the effects of p-v provisions on value, delta, and vega of equity-based compensation. We find large differences in the value of p-v awards...

As of February 28, 2006, 958 publicly held companies accelerated the vesting of some or all of their employee stock options in advance of adopting SFAS 123 (R). We examine both the market reaction to these accelerations, as well as the determinants of the decision. Investors, in general, react...

This study examines practitioners' perceptions of uses of stock option compensation expense. Specifically, Statement of Financial Accounting Standard (SFAS) No. 123(R) requires firms to report the estimated fair value of stock option compensation as an expense over the employees' required...

The objective of this study is to understand the relation between equity market values and stock-based employee compensation expense that is disclosed, but not recognized in determining net income, under Statement of Financial Accounting Standards (SFAS) No. 123. In particular, we predict and...

In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock...