An IFRS 2 and FASB 123 (R) Compatible Model for the Valuation of Employee Stock Options |
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Authors: | Email author" target="_blank">Manuel?AmmannEmail author Ralf?Seiz |
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Institution: | (1) Swiss Institute of Banking and Finance, University of St. Gallen, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland |
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Abstract: | In this paper, we show how employee stock options can be valued under the new reporting standards IFRS 2 and FASB 123 (revised)
for share-based payments. Both standards require companies to expense employee stock options at fair value. We propose a new
valuation model, referred to as Enhanced American model, that complies with the new standards and produces fair values often
lower than those generated by traditional models such as the Black–Scholes model or the adjusted Black–Scholes model. We also
provide a sensitivity analysis of model input parameters and analyze the impact of the parameters on the fair value of the
option. The valuation of employee stock options requires an accurate estimation of the exercise behavior. We show how the
exercise behavior can be modeled in a binomial tree and demonstrate the relevance of the input parameters in the calibration
of the model to an estimated expected life of the option.
JEL Classification G13, G30 |
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Keywords: | employee stock options executive compensation IFRS 2 FASB 123 (R) |
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