Using Auctions to Price Employee Stock Options: The Case of Zions Bancorporation ESOARS

43 Pages Posted: 5 Mar 2007

See all articles by Sumon C. Mazumdar

Sumon C. Mazumdar

Law and Economics Consulting Group (LECG), LLC; University of California, Berkeley - Haas School of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Rahul Surana

Law and Economics Consulting Group (LECG), Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2007

Abstract

To estimate the grant-date expense of their employee stock options (ESOs), as required under the new accounting rules (FAS 123R), companies have typically had to choose among various theoretical valuation models because there is no secondary market for ESOs. Different models, all permissible under FAS 123R, produce widely different values, raising questions about the efficacy of the new rules. We study an alternative market-based scheme, recently proposed by Zions Bancorporation, in which options are valued by means of an online auction of securities (ESOARS) that track the aggregate payments made to the reference ESOs. Zions has conducted two ESOARS auctions, under somewhat different rules (in June 2006 and May 2007). We investigate whether the auctions represent an effective, arms-length approach to the pricing of ESOs - as indicated by bidders' demand elasticity and a comparison of the auction prices to various model-based estimates. Despite legitimate concerns about size and seller incentives, we find that the auction mechanism appears quite resilient in terms of delivering fair values of ESOs. In particular, the 2007 auction - with rules that, for instance, reduce incentives to delay bidding ('snipe') - produced a value similar to those generated by models that explicitly consider the historical pattern of employees' early exercise decisions (e.g., Bajaj et. al. (2006)). Policy and other implications of our findings are discussed as well.

Keywords: auctions, employee stock options, financial reporting

JEL Classification: G10, G13, G18, D44

Suggested Citation

Mazumdar, Sumon C. and Nanda, Vikram K. and Surana, Rahul, Using Auctions to Price Employee Stock Options: The Case of Zions Bancorporation ESOARS (August 14, 2007). Available at SSRN: https://ssrn.com/abstract=967477 or http://dx.doi.org/10.2139/ssrn.967477

Sumon C. Mazumdar

Law and Economics Consulting Group (LECG), LLC ( email )

2000 Powell Street, Suite 600
Emeryville, CA 94608
United States
510-450-5493 (Phone)

University of California, Berkeley - Haas School of Business

Finance Department
Berkeley, CA 94720
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Rahul Surana (Contact Author)

Law and Economics Consulting Group (LECG), Inc. ( email )

Suite 600
2000 Powell Street
Emeryville, CA 94608
United States

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