Valuation and incentive effects of hurdle rate executive stock options

Valuation and incentive effects of hurdle rate executive stock options Traditional executive stock options are often criticized for inherently weak links between pay and performance. Hurdle rate executive stock options represent a viable improvement. However, valuing these options presents extraordinary analytic difficulties. With a constant dividend yield the strike price becomes a path-dependent function of the stock price and exact analytic valuation is intractable. To solve this problem, we apply the Monte Carlo valuation approach developed by Longstaff and Schwartz (Rev Financ Stud 4:113–147, 2001) to estimate the value of path-dependent American options. We also extend the methodology to incorporate the theoretical framework by Ingersoll (J Bus 79:453–487, 2006) to permit subjective valuation influenced by an executive’s risk aversion. Review of Quantitative Finance and Accounting Springer Journals

Valuation and incentive effects of hurdle rate executive stock options

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Springer US
Copyright © 2008 by Springer Science+Business Media, LLC
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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  • Managerial incentive and corporate investment and financing decisions
    Agrawal, A; Mandelker, G

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