| Summary: | 碩士 === 國立中央大學 === 財務金融研究所 === 90 ===
Abstract
According to previous published literatures, I have learned that the construction of ESO is very complicated which includes amounts of clauses. As I surveyed a number of literatures, I find that most of them discussed effects of single clause on ESO. It doesn’t meet the real construction of ESO, which consists of many clauses in practice. As a result I try to get two clauses, reset feature, vesting period, together to discuss their interactions with each other. In addition I find that the life of ESO is always long-term in practice. In spite of such characteristics, previous scholars still assumed constant interest rate along option life. I think the assumption may be not appropriate in such a long run period. In this way I try to employ a stochastic rate process in my work to see if what I get is different from what is in constant rate.
In reference to previous paragraphs, I have reached some interesting conclusions. Vesting period is relevant in certain cases. For example in non-dividend model under risk neutral vesting is useless but significant under risk averse. It implies that the risk preference of managers is relevant in designing ESO. In addition I try to impose stochastic rate process on valuation of ESO first ever. Although the characteristics of clauses are always the same under each condition, the estimated value of ESO is substantially different in constant rate and stochastic rate(Appendix). It is clear to say that assumption of interest rate could distort value of ESO substantially. Furthermore I find resetting has no extra incentive to stimulate enhancing stock price by means of delta ratio. This finding is consistent with literatures referring to resetting, however, it is still an important tool to restore incentives of management in downturn market. From now on we have learned that each clause has its own economic meanings to ESO contract. If we have many specific clauses in one contract, our analyses of such a contract should account for every possible situations to make the construction of ESO contract more attractive to management.
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