Financial Accounting and Equity Markets

Valuing Executive Stock Options: Performance Hurdles, Early Exercise and Stochastic Volatility

Philip Brown^{a, b}, Alex Szimayer^c

^aAustralian School of Business, University of New South Wales, Sydney, 2052, Australia

^bUWA Business School, University of Western Australia, Crawley, 6009, Australia

^cDepartment of Financial Mathematics, Fraunhofer ITWM, Fraunhofer-Platz 1, 67663 Kaiserslautern, Germany

Abstract

Accounting standards require companies to assess the fair value of any stock options granted to executives and employees. We develop a model for accurately valuing executive and employee stock options, focusing on performance hurdles, early exercise and uncertain volatility. We apply the model in two case studies and show that properly computed ...