Valuation and incentive effects of hurdle rate executive stock options

Cheung, Joe and Corrado, Charles 2009, Valuation and incentive effects of hurdle rate executive stock options, Review of quantitative finance and accounting, vol. 32, no. 3, pp. 269-285, doi: 10.1007/s11156-008-0093-8.

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Title Valuation and incentive effects of hurdle rate executive stock options
Author(s) Cheung, Joe
Corrado, Charles
Journal name Review of quantitative finance and accounting
Volume number 32
Issue number 3
Start page 269
End page 285
Publisher Springer
Place of publication Dordrecht, The Netherlands
Publication date 2009-04
ISSN 0924-865X
Keyword(s) executive stock options
Monte Carlo simulations
hurdle rate
Summary 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.
Notes Published online: 5 June 2008
Language eng
DOI 10.1007/s11156-008-0093-8
Field of Research 150205 Investment and Risk Management
HERDC Research category C1.1 Refereed article in a scholarly journal
HERDC collection year 2009
Copyright notice ©2008, Springer Science+Business Media, LLC
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Document type: Journal Article
Collections: Faculty of Business and Law
School of Accounting, Economics and Finance
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