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An Upper Bound for the Firm's Cost of Employee Stock Options
Haim A. Mozes
Vol. 24, No. 4 (Winter, 1995), pp. 66-77
Stable URL: http://www.jstor.org/stable/3665951
Page Count: 12
You can always find the topics here!Topics: Stock prices, Investment risk, Business risks, Stock options, Expiration dates, Systematic risk, Period costs, Portfolio diversification, Dividends, Financial portfolios
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This paper provides an upper bound to the firm's cost of employee stock options (ESOs). The upper bound depends on the risk and return of the underlying stock and on all other investment opportunities that are available, but it does not depend on employees' risk preferences or wealth. The only assumption that is required is that employees do not hedge their ESOs. One result of the model is that the overstatement from using options-pricing models for ESOs is likely to be greatest for firms with high unsystematic risk, such as small, high-tech firms in the start-up or growth stages.
Financial Management © 1995 Financial Management Association International