Question

QUESTION:

Expensing of employee stock options (ESOs) is now a requirement in financial reporting both under U.S. GAAP and IFRS. However, management, especially in the United States, successfully resisted expensing for many years before the expensing rules were finally adopted. Even now, accounting for ESOs remain a controversial topic.

Required

a) Discuss the effect of this asymmetric feature of ESOs on managers’ incentive to undertake risky projects. In other words, do these features lead to managers undertaking high-risk projects or low-risk projects?

DETAIL ANSWER. SHORT ANWERS WILL BE REJECTED

Answer 1

We use a large database on ESO exercises to document characterstics of exercise behavior and calibrate a utility based model for how differences in exercise behavior are manifested in option values and incentives. option values and incentives from the model calibrations are compared to those computed from models used to value tradeable options. our practitioners oabout how differences in exercise behavior and model choice affect measure of eso values and incentives and underscore the importance of gaining a through understanding the underlying economic forces thar affect the behavior of eso holders.We use a large database on ESO exercises to document characterstics of exercise behavior and calibrate a utility based model for how differences in exercise behavior are manifested in option values and incentives. option values and incentives from the model calibrations are compared to those computed from models used to value tradeable options. our practitioners oabout how differences in exercise behavior and model choice affect measure of eso values and incentives and underscore the importance of gaining a through understanding the underlying economic forces thar affect the behavior of eso holders.We use a large database on ESO exercises to document characterstics of exercise behavior and calibrate a utility based model for how differences in exercise behavior are manifested in option values and incentives. option values and incentives from the model calibrations are compared to those computed from models used to value tradeable options. our practitioners oabout how differences in exercise behavior and model choice affect measure of eso values and incentives and underscore the importance of gaining a through understanding the underlying economic forces thar affect the behavior of eso holders.