Evaluating Incentive Options

Wei Xiong and Ronnie Sircar

No 253, Econometric Society 2004 North American Winter Meetings from Econometric Society

Abstract: We provide an analytical and flexible framework to evaluate incentive options. Our model not only considers vesting periods and trading and hedging restrictions on the holders, but also specifically includes provisions of reloading and resetting to capture the fact that firms tend to grant more options after existing options are either exercised or become deep out of the money. By treating the incentive option as a flow of barrier options, we are able to obtain a near-explicit formula for the option value. Our model allows us to discuss many issues related to incentive options such as their issuing cost, exercising strategies, and induced incentives. Especially, we highlight some significant interactions among different features of incentive options

Keywords: Executive Stock Options; Incentives; Resetting and Reloading; Subjective Valuation (search for similar items in EconPapers)
JEL-codes: G10 G13 (search for similar items in EconPapers)
Date: 2004-08-11
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nawm04:253

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