Accounting Papers

Document Type

Journal Article

Date of this Version

6-2002

Publication Source

Journal of Accounting Research

Volume

40

Issue

3

Start Page

613

Last Page

630

DOI

10.1111/1475-679X.00064

Abstract

The costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives, accounting choice, financing decisions, and the valuation of equity. We present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock-return volatility that is easily implemented using data from only the current year’s proxy statement or annual report. This method can be applied to either executive stock option portfolios or to firm-wide option plans. In broad samples of actual and simulated CEO option portfolios, we show that these proxies capture more than 99% of the variation in option portfolio value and sensitivities. Sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics, and is most severe in samples of CEOs with a large proportion of out-of-the-money options. However, the proxies’ explanatory power remains above 95% in all subsamples.

Copyright/Permission Statement

This is the peer reviewed version of the following article: Core, J. and Guay, W. (2002), Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility. Journal of Accounting Research, 40: 613–630. which has been published in final form at doi: 10.1111/1475-679X.00064. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms.

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Date Posted: 27 November 2017