Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Stock options may cost shareholders much less than previously thought

17.01.2007
Controversial stock options for company executives may be much less costly to shareholders than current mathematical models suggest, according to research presented Jan. 5 by Tim Leung of Princeton's Department of Operations Research and Financial Engineering.

At the annual meeting of the American Mathematical Society, Leung demonstrated that, in one scenario, stock options were worth about half of what they would be valued if one were to calculate their worth using a conventional method.

Nearly half of compensation for chief executives comes in the form of stock options. Out of concern that such options might be overly burdensome on shareholders, the U.S. Financial Accounting Standards Board since 2004 has required firms to estimate and report their cost.

One model commonly used by firms to calculate the cost of options is known as the Black-Scholes model. But this model and others are not nearly as nuanced as they should be, particularly in accounting for the psychology driving employees' behavior, according to Leung, a graduate student who collaborated with Associate Professor Ronnie Sircar.

Leung and Sircar found that other models don't take into account a number of important factors, including the following:

• employees have to weigh the risk that their stock option might lose value; since most people are risk-averse, they tend to exercise their options very early, preferring to take a tiny gain rather risk losing any profit – even though it is more likely that their options will increase greatly in value down the road;

• employees who are hoping to leave or fear that they might be fired tend to exercise their options earlier than they would if they felt secure in their employment;

• employees have to forfeit their options if they leave or are fired before their options have vested.

"Taking into account these factors has a significant bearing on how employee stock options are valued," said Leung.

Leung and Sircar submitted a paper on this research to the journal Social Science Research Network, where an abstract is published online.

Teresa Riordan | EurekAlert!
Further information:
http://ssrn.com/abstract=943926
http://www.princeton.edu

More articles from Business and Finance:

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: The fastest light-driven current source

Controlling electronic current is essential to modern electronics, as data and signals are transferred by streams of electrons which are controlled at high speed. Demands on transmission speeds are also increasing as technology develops. Scientists from the Chair of Laser Physics and the Chair of Applied Physics at Friedrich-Alexander-Universität Erlangen-Nürnberg (FAU) have succeeded in switching on a current with a desired direction in graphene using a single laser pulse within a femtosecond ¬¬ – a femtosecond corresponds to the millionth part of a billionth of a second. This is more than a thousand times faster compared to the most efficient transistors today.

Graphene is up to the job

Im Focus: LaserTAB: More efficient and precise contacts thanks to human-robot collaboration

At the productronica trade fair in Munich this November, the Fraunhofer Institute for Laser Technology ILT will be presenting Laser-Based Tape-Automated Bonding, LaserTAB for short. The experts from Aachen will be demonstrating how new battery cells and power electronics can be micro-welded more efficiently and precisely than ever before thanks to new optics and robot support.

Fraunhofer ILT from Aachen relies on a clever combination of robotics and a laser scanner with new optics as well as process monitoring, which it has developed...

Im Focus: The pyrenoid is a carbon-fixing liquid droplet

Plants and algae use the enzyme Rubisco to fix carbon dioxide, removing it from the atmosphere and converting it into biomass. Algae have figured out a way to increase the efficiency of carbon fixation. They gather most of their Rubisco into a ball-shaped microcompartment called the pyrenoid, which they flood with a high local concentration of carbon dioxide. A team of scientists at Princeton University, the Carnegie Institution for Science, Stanford University and the Max Plank Institute of Biochemistry have unravelled the mysteries of how the pyrenoid is assembled. These insights can help to engineer crops that remove more carbon dioxide from the atmosphere while producing more food.

A warming planet

Im Focus: Highly precise wiring in the Cerebral Cortex

Our brains house extremely complex neuronal circuits, whose detailed structures are still largely unknown. This is especially true for the so-called cerebral cortex of mammals, where among other things vision, thoughts or spatial orientation are being computed. Here the rules by which nerve cells are connected to each other are only partly understood. A team of scientists around Moritz Helmstaedter at the Frankfiurt Max Planck Institute for Brain Research and Helene Schmidt (Humboldt University in Berlin) have now discovered a surprisingly precise nerve cell connectivity pattern in the part of the cerebral cortex that is responsible for orienting the individual animal or human in space.

The researchers report online in Nature (Schmidt et al., 2017. Axonal synapse sorting in medial entorhinal cortex, DOI: 10.1038/nature24005) that synapses in...

Im Focus: Tiny lasers from a gallery of whispers

New technique promises tunable laser devices

Whispering gallery mode (WGM) resonators are used to make tiny micro-lasers, sensors, switches, routers and other devices. These tiny structures rely on a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

“Lasers in Composites Symposium” in Aachen – from Science to Application

19.09.2017 | Event News

I-ESA 2018 – Call for Papers

12.09.2017 | Event News

EMBO at Basel Life, a new conference on current and emerging life science research

06.09.2017 | Event News

 
Latest News

Nerves control the body’s bacterial community

26.09.2017 | Life Sciences

Four elements make 2-D optical platform

26.09.2017 | Physics and Astronomy

Goodbye, login. Hello, heart scan

26.09.2017 | Information Technology

VideoLinks
B2B-VideoLinks
More VideoLinks >>>