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Valuation and incentive effects of hurdle rate executive stock options

journal contribution
posted on 2009-04-01, 00:00 authored by J Cheung, Charles Corrado
Traditional executive stock options are often criticized for inherently weak links between pay and performance. Hurdle rate executive stock options represent a viable improvement. However, valuing these options presents extraordinary analytic difficulties. With a constant dividend yield the strike price becomes a path-dependent function of the stock price and exact analytic valuation is intractable. To solve this problem, we apply the Monte Carlo valuation approach developed by Longstaff and Schwartz (Rev Financ Stud 4:113–147, 2001) to estimate the value of path-dependent American options. We also extend the methodology to incorporate the theoretical framework by Ingersoll (J Bus 79:453–487, 2006) to permit subjective valuation influenced by an executive’s risk aversion.

History

Journal

Review of quantitative finance and accounting

Volume

32

Issue

3

Pagination

269 - 285

Publisher

Springer

Location

Dordrecht, The Netherlands

ISSN

0924-865X

eISSN

1573-7179

Language

eng

Notes

Published online: 5 June 2008

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2008, Springer Science+Business Media, LLC

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