Executive Stock Options and IPO Underpricing Michelle Lowry• Smeal College of Business Penn State University E-mail: mlowry@psu.edu Phone: (814) 865-1483 Kevin J. Murphy Marshall School of Business University of Southern California E-mail: kjmurphy@usc.edu Phone: (213) 740-6553 July 31‚ 2006 Abstract In about one-third of US IPOs between 1996 and 2000‚ executives received stock options with an exercise price set equal to the IPO offer price (rather than a price determined by the market)
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Many years ago stock options were rarely used as incidental benefits for top executives. Nowadays‚ compensating employee whit stock options has become an increasingly common practice. Before the year 1996‚ only the intrinsic value method was used to record these transactions. This method distorted the issuer’s reported financial condition and results of operations‚ which could lead to inappropriate decisions taken by investors. Followed by the increased use of employee stock options and the surrounding
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STOCK OPTIONS - AN EFFECTIVE COMPENSATION METHOD Stock Options have become the greatest form of remuneration for big names in organizations across the United States (Hall‚ 2000). The senior executives‚ who are given this option‚ can buy shares of the company at what Hall (2000) describes as the “exercise price”. They could be given “at the money”‚ “out of the money” or “in the money” price (Hall‚ 2000). Stock Options are helpful in motivating the holders to perform for the benefit of the company
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discuss the issues related to stock options and how they should be accounted for. Introduction In the early 1990s‚ FASB proposed an accounting rule calling for corporations to recognize compensation expense for certain stock options when they were granted to executives and employees. This proposal was met with strong opposition from many different sources including: Congress who passed a resolution by vote urging FASB to drop the proposed standard‚ business executives who stood to lose the most
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Term paper on ESOP Submitted by Hitesh.K.R (1pi11mba59) Finance Cohart 1 What is an ESOP? ESOP stands for Employee Stock Ownership Plan and is an employee benefit plan which makes the employees owners of stock in that company. An ESOP is required by law to invest primarily in the stock of the sponsoring employer. An ESOP is a qualified defined contribution plan and is similar to profit sharing plans. The employer can use it as a conduit for borrowing money from a bank or other
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implement the proposed employee stock option plan? In a typical stock option plan‚ the employee is offered a specific number of shares which he/she can exercise (buy) at some specified time in the future. The price at which the employee can buy the stock is equal to the market price at the time the stock option was granted (grant price). The employee ’s gain is equal to the market value of the stock at the time it is exercised‚ less the grant price. If the market price of the stock remains the same
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Stock Options Paper Stock options are a great incentive to get good‚ smart‚ and ambitious workers. You look at Coke and Pepsi they offer there delivery drivers‚ and there salesmen stock options to give them that incentive to sell and delivers those goods. What exactly are stock options is a question many people may ask. Stock options are when a company gives you the right to buy a certain number of shares at an agreed upon price that the employer specifics. Private and public companies
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derivatives traders is b. The LIBOR rate 3. Duration of a ten-year 6% coupon bond with a face value of $100 is a. Less than 10 years. 4. Which of the following are always positively related to the price of a European call option on a stock? c. The volatility 5. When we talked about Vega hedging‚ if a portfolio has 1000 shares of SPY and 10 contracts of at-the-money December 2013 put option on SPY (and nothing else in the portfolio)‚ is the portfolio vega neutral? c. No‚ the portfolio
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The price of a stock is $50. The stock pays a dividend of $5 in 3 months. A 6-month European put option on the stock has a strike price of $48 and a premium of $4.38. The continuously compounded interest rate is 8%. Calculate the premium for a 6-month European call option on the stock with a strike price of $48. * A 1.02 * B 3.36 * C 3.46 * D 4.38 * E 5.40 2 1. An "exchange call option" gives the owner of the option the right to give up one share of Stock A in exchange
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names or that do not have the box below checked will not be graded. Please check the box and record your student number below to indicate that you have read and abide by the statements above. 1. Describe‚ in general terms‚ Sally’s Executive Stock Option decision. You should recognize this as an NPV problem that compares alternative future cash flows. What is the NPV of the cash alternative? The cash alternative being referred to here is the Telstar Communications option tranche on offer‚ the
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