The Opportunity Cost Of Executive Stock Options And Measurement Design

A hot question in finance and incentive literature concerns the use ofstock options. The primary goal of executive equity incentive is to alignthe interests of management with those of shareholders. Firms grant totheir executives stock options as an incentive device that is non-tradablefor the incentive to work that the options are meant to provide as long asthey are held by executives. Executives are undiversified for it. Therefore,the cost of issuing these options is not equal to the amount the companywould receive if it sold the same options to outside investors.Murphy (1999) defined clearly: the difference is the "opportunity"cost of the firm which grant options. Only when the incentive effect ofstock options is higher than the opportunity costs, the stock optionsshould be granted.Based on the options pricing theory of Financial Engineering, in thisarticle, the author detailedly analyzes executives stock options'characteristic, fred the cause of the opportunity cost, from the perspectiveof shareholders, by the analytical framework binomial models, incomparison to the two different situations, that shareholders granted tothe managers stock options or sell it to outside investors, according to thechanges in shareholder's wealth, design an opportunity cost measurementmodel. Finally, analyzed parameters in the model. The article consists ofsix chapters:ChapterⅠis the introduction, which elaborates actuality anddirection of the field, summarizes the literature, and introduces thecontent and structure.ChapterⅡis the theoretical basis for the article, give a briefdescription of the theory of the opportunity costs of stock options,including its meaning, form and necessity of research and comparison ofthe existing options pricing models.ChapterⅢbuild an opportunity cost measurement model under theanalysis framework of binomial models, combining capital asset pricing rmethod.ChapterⅣtake the sensitivity analysis to the parameters in themodel, based on the measurement model, including stock options scheme, the company factors, the market factors and the managers' acts.ChapterⅤsimulated models tested by the validity of a quantitativestudy of the relevant factors and the opportunity costs of the incentiveeffects of impact.ChapterⅥdraws the main conclusions and the innovation, pointsout the insufficiency and the forecast.