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Valuing the reload features of executive stock options

Jane Saly, Ravi Jagannathan, and Steven Huddart

For options with a Reload feature, the holder is automatically entitled to new options when the initial option is exercised. Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of a reload feature because the Financial Accounting Standards Board believes it is not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to value options and the reload feature at the grant date. Ignoring the reload can substantially understate the value of the option. Accordingly, the Financial Accounting Standards Board may wish to reconsider the accounting for reload features.

Keywords: compensation, valuation, binomial option pricing model, restoration, replacement, continuation, replenishment, accelerated ownership

JEL Classification: C80, D84, J33, M12, M41

NBER Working paper number W7020

Accounting Horizons, Volume 13, Number 3, (September 1999) 219-240

Download pdf file of paper.

Download a Mathematica notebook that values reload options.

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-0041
(814) 863-8393 fax
huddart@psu.edu
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