The Research On The Pricing Model Of Executive Stock Options

Using options pricing theory, contract theory, accounting theory and corporate governance theory, this paper analyzes the current executive stock options(ESOs) pricing models. First, this paper contrasts the conception of executive stock options, the call stock options and real options, furthermore, this paper discusses the difference between executive stock options and employee stock options. Because of the complexities and specialties of ESOs, the executive stock options pricing models can't simply use the call stock options pricing models. Second, this paper points out the shortcomings of the current ESOs pricing models, and improves the ESOs pricing models. The third, this paper analyzes the impacts of ESOs on the corporate governance. The fourth, this paper selects two companies in our country and analyzes how the two corporate enforced their ESOs schemes. At last, this paper makes some conclusions and puts forward some suggestions to improve our country ESO schemes.This paper can be divided by three parts and six chapters.The first part contains two chapters. The first chapter is introduction of this paper. It discusses the background, meanings, methods and schemes of this paper. The first section introduces the background; the second section introduces the theoretical meaning and practice meaning of this paper; the third section introduce method of this paper; the fourth section introduce the scheme of this paper.The second chapter is composition of ESOs papers concerned. The first section introduces the categories and progress of options. The second section introduces the currently used options pricmg models, such as binomial method and martingale method. If the stock price is not constant but jump occasionally, or if the interest rate is not constant but random, the ESOs pricing model must be changed, then I introduces some revised ESOs pricing model. The third section talks about specialties of the ESOs pricing models, the executive stock option pricing models can't simply use the call stock option pricing models. The fourth section analyzes how the ESOs scheme influences the corporate governance.The second part includes the third and the fourth chapter, and it is the backbone of this paper. The third chapter tells the difference between executive stock options and call options. The executive stock options have five exercise approaches in reality, today only first exercise way was studied by economists. This paper tells the difference of five exercise approaches. Because each exercise approaches has different cash flow and dilution, so the value is different. This paper figures out each exercise approaches. The first section analyzes the accounting attribute of ESOs; the second section figures out the pricing models under different approaches. When ESOs maturity don't expire, if the executive leaves the corporate he or she served, he or she will lose his or her ESOs which he or she was granted years ago. The third section analyzes the ESOs pricing model when executive leave his corporate he served before maturity is not over. The fourth section analyzes the ESO pricing model considered the personal tax rate. The fifth section analyzes the ESO pricing model when the corporate bought back its own stock in open market.The most important reason why corporate grant executive ESOs is to align the executive with corporate and to cut the cost down, however, there appears many new agency cost problems which interfere all aspects of corporate governance. ESOs can cut down certain kind of agency costs, however, they can bring forward some new agency costs. The fourth chapter analyzes new agency problems. When the maturity comes and the stock price is higher than the exercise price, the executives who hold these ESOs have the right to exercise them. If the company use new issued stocks to satisfy the executive needs, it will dilute equity and have impact on many accounting index. It requires a lot of new questions, such as earning per share and debt/asset ratio. If we don't take the dilution into account, it will give the investors mislead information. Now we use intrinsic method to calculate diluted ESOs, but intrinsic method don't take time value into account, it will lower the dilution impaction especially when ESOs is out of the price. So the first section analyzes how the ESOs impact the accounting index. Because the executives hold so many ESOs, they take a huge risk. When the ESOs are in different place, the risk executive undertaken is different. So the second section analyze the relationship between risk undertaken and ESOs valuations whose the executives think about it. The traditional ESOs(vanilla options) have many shortcomings, many economists use some new kinds of options to take place the traditional one, so the third section compare the traditional ESOs with new kinds of options.The third part includes the five and six chapters, and it is the conclusion of this paper. The fifth chapter focuses on the Shenzhen express case and China petroleum case, and analyzes how the two firms enforced their ESOs scheme. Compared with the oversea country, we can see the shortcoming and the advantages of ESOs scheme and how to improve on the ESOs scheme. The first section introduce current situation ESOs schemes in our country, and the second section analyze the ESOs scheme of Shenzhen express, and the third section analyzes the ESOs scheme of China petroleum, and the fourth section contrasts the two corporate ESOs scheme.The sixth chapter is the conclusion, counsels and innovations of this paper. The first part is the conclusion, and the second part is the counsel, and the third part is the innovations and shortcomings of this paper.