Financial Markets and Portfolio Management

, Volume 19, Issue 4, pp 381–396 | Cite as

An IFRS 2 and FASB 123 (R) Compatible Model for the Valuation of Employee Stock Options

Article

Abstract

In this paper, we show how employee stock options can be valued under the new reporting standards IFRS 2 and FASB 123 (revised) for share-based payments. Both standards require companies to expense employee stock options at fair value. We propose a new valuation model, referred to as Enhanced American model, that complies with the new standards and produces fair values often lower than those generated by traditional models such as the Black–Scholes model or the adjusted Black–Scholes model. We also provide a sensitivity analysis of model input parameters and analyze the impact of the parameters on the fair value of the option. The valuation of employee stock options requires an accurate estimation of the exercise behavior. We show how the exercise behavior can be modeled in a binomial tree and demonstrate the relevance of the input parameters in the calibration of the model to an estimated expected life of the option.

Keywords

employee stock options executive compensation IFRS 2 FASB 123 (R) 

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Copyright information

© Swiss Society for Financial Market Research 2005

Authors and Affiliations

  1. 1.Swiss Institute of Banking and FinanceUniversity of St. GallenSt. GallenSwitzerland

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