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The Valuation of Stock Options**

Published online by Cambridge University Press:  19 October 2009

Harold Bierman Jr
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Extract

There is little question that stock options have value, but there is considerable question as to how stock options should be valued. Persons studying the valuation question and writing in business periodicals have tied the value of the stock option to the expected or the actual appreciation in the value of the stock.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 2 , Issue 3 , September 1967 , pp. 327 - 335
Copyright
Copyright © School of Business Administration, University of Washington 1967

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References

1 For example see Campbell, E. D., “Stock Options Should be Valued,” Harvard Business Review, July–August, 1961, pp. 52–58Google Scholar; and Holland, D. M. and Lewellen, Wilbur G., “Probing the Record of Stock Options,” Harvard Business Review, March–April, 1962, pp. 132–150Google Scholar.

2 Boness, A. James, “Elements of a Theory of Stock-Option Value,” The Journal of Political Ecomomy March–April, 1962, pp. 132–150Google Scholar.

3 Ibid., p. 169.

4 Ibid.

5 This expression for the absolute value is equivalent to the formulation of Boness.

6 Several aspects of options are being neglected; for example, an option may offer leverage and is a type of loan. Also, dividends are foregone during the period of time before the option is exercised.

7 If we are dealing with a corporation's stock option plan, K will be equal to zero.

8 Compare with the cited quotation.

9 The tax treatment of qualified gains associated with stock options as capital gains does tend to make stock options a desirable form of compensation from the point of a manager in a high tax bracket. But since the firm cannot deduct an expense for the stock option, the granting of a stock option is not an unmixed blessing from a tax standpoint.