UK Executive Stock Option Valuation: A Conditional Model

31 Pages Posted: 4 Feb 2005

See all articles by Edward Lee

Edward Lee

University of Manchester - Alliance Manchester Business School

Konstantinos Vonatsos

Manchester Business School

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

We value UK executive stock options (ESOs) as American options that are awarded conditional on the probability of the holders achieving some performance criteria. Unlike the standard Black and Scholes (BS) model, which is universally used both in the literature and practice, this provides a more realistic representation of UK ESOs. We show that UK ESOs actually have less value and contain more incentives than they appear under the BS approach. Specifically, we observe a 17% average discount in the value of the ESOs when compared to their BS value. In addition, we find significantly higher incentive levels when we measure the sensitivity of the options using the hedge ratio, i.e. the option's delta. We argue that these findings have implications for two contemporary debates in the UK, i.e. the substitution of ESOs by Long-Term Incentive Plans (LTIPs) and the discounting of ESO value from company profits.

Keywords: Managerial Compensation, Executive Stock Options, Option Valuation

JEL Classification: G30, J30, J33

Suggested Citation

Lee, Edward and Vonatsos, Konstantinos and Stathopoulos, Konstantinos, UK Executive Stock Option Valuation: A Conditional Model (May 2007). Available at SSRN: https://ssrn.com/abstract=650124 or http://dx.doi.org/10.2139/ssrn.650124

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Konstantinos Vonatsos

Manchester Business School ( email )

Manchester, M13 9PL
United Kingdom

Konstantinos Stathopoulos (Contact Author)

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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