Backdating executive stock options—An ex ante valuation |
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Authors: | Hans Marius EiksethSnorre Lindset |
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Institution: | a Trondheim Business School, Hist avdeling TOH, 7004 Trondheim, Norway b Department of Economics, NTNU, NO-7491 Trondheim, Norway |
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Abstract: | When backdating executive stock options (ESOs), the exercise price is set in favor of the recipient executive. Relative to a non-backdated benchmark, we find an (ex ante) upper bound for the cost of backdating to shrink from 10% to about 3.7%, as a consequence of the regime change represented by the Sarbanes-Oxley act (SOX).We frame the backdating behavior as a (compound) exotic option, considering both simple and extended models of the underlying ESO—in the latter case we draw on the analytical ESO models of Sircar and Xiong (2007). Post-SOX, we use a Longstaff-Schwartz inspired least squares Monte Carlo approach. |
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Keywords: | Backdating of executive stock options Exotic lookback options SOX |
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