The Valuation of Employee Stock Option in the Uncertainty Holding Period

According to the recent accounting principles in International Accounting Standards Committee (IASC) and Financial Accounting Standards Board (FASB) documented the employee stock options (ESOs) as cost reasonably, and revealed in companies financial reports. Because of the many features of ESOs, it becomes difficult to value these specific options. A main problem in estimating for ESOs is that employees may like to early exercise of their options, due to some restrictions on ESO transferability. Therefore, how to reasonably value the ESOs and capture the feature of the uncertain early exercise is what this study would present.

This study would discuss the uncertainty of early exercise form employees. Furthermore, it also discussed the effects on valuation of ESOs when considered the different kinds of setting on exercise behaviors. Here used some distributions in statistics to simulate this uncertainty on ESOs. Consequently, after considering the features of employee option, the comparison of different valuation techniques would provide a better way in pricing the ESOs.