Factors Affecting The Stock Option Pricing

Equity incentive system considered as an effective way to resolve "principal-agent" problem, has been widely used in Europe and America from eighties and nineties of the last century. In China, "Equity Incentive Measures for the Administration of Listed Companies(Trial)" the Securities Regulatory Commission issued in 2006 has become a listed company on the basis of the implementation of equity incentive. Equity incentive in various forms, and for each of the listed companies issuing stock options as incentives,how to price stock options is important and inevitable. The fair value of the stock options determine the cost of equity incentives, affecting the operating results of listed companies,related to the success or failure of the implementation of equity incentive.At present, the vast majority of Chinese listed companies implementing incentive stock options use BS option pricing model to determine the fair value of stock options simply. However whether BS model is suitable for Chinese capital market and how much its effectiveness is, we do not know.In this paper, we treat the fair value of stock options as the research object, collected data of listed companies issuing incentive stock options from 2006 to 2014. On the basis of the relevant literature, we divided factors into factors within the model, the company characteristic factors and factors of corporate governance, and analyzed the impact of various factors on the option value theoretically. Finally, we did the empirical analysis of individual data, and study the correlation on the influencing factors and value of stock options.The empirical results show that the factors BS model involved mostly have a significant correlation with the value of stock options. The company characteristic factors have an impact on the fair value of stock options. The larger the company and the better the growth of the company the option value is higher, but profitability is negatively correlated with the option value.The impact of corporate governance factors ––largest shareholder ratio and proportion of independent directors––is not obvious. But by grouping regression analysis, we also found that the independent directors in dispersed-ownership-structure companies have greater independence and more significant supervisory role.Finally, we put forward a number of recommendations on how to improve the pricing of options of shares of listed companies, according to results of the study and for the study of the problems found. Firstly, listed companies need to integrate the use of various pricing methods, avoiding the flaw of using B-S model only. Secondly, the exercise price need to consider more factors. Finally, it is necessary to strengthen the independence of the independent directors.