Seminario 14/24: S. Álvarez (UMU) – Voluntary early exercise and performance-vested option grants: an analysis of the incentive effects.

Información

ABSTRACT: Classical option pricing models are not well suited to the valuation of executive stock options (ESOs) and their incentive effects. The special characteristics of ESOs make standard methods difficult to apply to these options. The Wu-Lin model is a completely analytical expression based on the common feature of attaching performance targets to option vesting. We provide an extension on the Wu-Lin model incorporating, through an exogenous barrier, the fact that options may be exercised early at the executive’s discretion. Focusing on the performance-vesting condition and the voluntary early exercise, we conduct sensitivity analyses of the option value and executive’s incentives to increase the firm’s stock price (delta) and stock return volatility (vega). The results highlight the importance of considering the executive’s early exercise behavior in the design of performance-vested stock option plans to create the right incentives according to the risk-related goals.