ADMN 4300H Lecture Notes - Lecture 15: United Express, Incentive Compatibility, Deadweight Loss
30 Mar 2020
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Executive stock options (esos: exist to align the interests of shareholders and managers, are call options (technically warrants) on the employer"s shares. Thus, the ceo can never capture the speculative value - only the intrinsic value: this dead weight loss is overcome by the incentive compatibility for the grantor. Example 24. 1: options at united express corporation according to the proxy statement filed in fiscal year 2016, rich pettit, the ceo of. United express corporation, was granted 1. 662 million stock options. The average exercise price of the options was . 99, and we will assume that all of the options were granted at the money. We"ll also assume that the options expire in five years and that the riskfree rate is 5 percent. This information implies that: the stock price, s, equals the exercise price, e, . 99, so ln (s/e) = in (1) = 0 in the formula, the risk-free rate, r, equals 0. 05, the time interval, t, equals 5.
