Valuing the Reload Features of Executive Stock Options

Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of any reload feature because, at the time of writing the standard in 1995, the Financial Accounting Standards Board believed it was not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to determine the grant date value of such options. Ignoring the reload feature can substantially understate the value of the option: the reload feature increases the value of an otherwise similar option by 24 percent in the example we consider. In view of the potential significance of the reload feature and the versatility of the Binomial Option Pricing Model, the Financial Accounting Standards Board may wish to reconsider the accounting for options with a reload feature.

Optimal Contracting With Endogenous Social Norms

Research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers. Within an agency framework, we model endogenous social norms by assuming that each agent’s cost of implementing an action depends on the social norm for that action, defined to be the average level of that action chosen by the agent’s peer group. We show how endogenous social norms alter the effectiveness of monetary incentives, determine whether it is optimal to group agents in a single or two separate organizations, and may give rise to a costly adverse selection problem when agents\u27 sensitivities to social norms are unobservable

Disclosure requirements and stock exchange listing choice in an international context

We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking to minimize trading costs. We find that exchanges competing for trading volume engage in a "race for the top" whereunder disclosure requirements increase and trading costs fall. This result is robust to diversification incentives of risk-averse liquidity traders, institutional impediments that restrict the flow of liquidity, and listing costs. Under certain conditions, unrestricted liquidity flows to low disclosure exchanges. The consequences of cross-listing and harmonization of disclosure standards are modeled

Managerial Responses to Incentives: Control of Firm Risk, Derivative Pricing Implications, and Outside Wealth Management

We model a firm’s value process controlled by a manager maximizing expected utility from restricted shares and employee stock options. The manager also dynamically controls allocation of his outside wealth. We explore interactions between those controls as he partially hedges his exposure to firm risk. Conditioning on his optimal behavior, control of firm risk increases the expected time to exercise for his employee stock options. It also reduces the percentage gap between his certainty equivalent and the firm’s fair value for his compensation, but that gap remains substantial. Managerial control also causes traded options to exhibit an implied volatility smile

Employee stock options: much more valuable than you thought

Previous papers have argued that trading restrictions can result in a typical employee stock option having a subjective value (certainty equivalent value) that is substantially less than its Black-Scholes value. However, these analyses ignore the manager's ability to (at least partially) control the risk level within the firm. In this paper, we show how managerial control can lead to such options having much larger certainty equivalent values for employees who can exercise control. We also show that the potential for early exercise is substantially less valuable with managerial control. The certainty equivalent value for a European option with managerial control can easily exceed the Black-Scholes value for a comparable option without control. However, it is questionable whether Black-Scholes is an appropriate benchmark for an option where the underlying process exhibits controlled volatility. We show how to obtain a risk-neutral valuation for such an option. That risk-neutral value can be substantially greater or less than the Black- Scholes value. Furthermore, the option's certainty equivalent value can also be greater or less than its risk-neutral value

Multiple novel prostate cancer susceptibility signals identified by fine-mapping of known risk loci among Europeans

Genome-wide association studies (GWAS) have identified numerous common prostate cancer (PrCa) susceptibility loci. We have fine-mapped 64 GWAS regions known at the conclusion of the iCOGS study using large-scale genotyping and imputation in 25 723 PrCa cases and 26 274 controls of European ancestry. We detected evidence for multiple independent signals at 16 regions, 12 of which contained additional newly identified significant associations. A single signal comprising a spectrum of correlated variation was observed at 39 regions; 35 of which are now described by a novel more significantly associated lead SNP, while the originally reported variant remained as the lead SNP only in 4 regions. We also confirmed two association signals in Europeans that had been previously reported only in East-Asian GWAS. Based on statistical evidence and linkage disequilibrium (LD) structure, we have curated and narrowed down the list of the most likely candidate causal variants for each region. Functional annotation using data from ENCODE filtered for PrCa cell lines and eQTL analysis demonstrated significant enrichment for overlap with bio-features within this set. By incorporating the novel risk variants identified here alongside the refined data for existing association signals, we estimate that these loci now explain ∼38.9% of the familial relative risk of PrCa, an 8.9% improvement over the previously reported GWAS tag SNPs. This suggests that a significant fraction of the heritability of PrCa may have been hidden during the discovery phase of GWAS, in particular due to the presence of multiple independent signals within the same regio

Effectiveness of a national quality improvement programme to improve survival after emergency abdominal surgery (EPOCH): a stepped-wedge cluster-randomised trial

BACKGROUND: Emergency abdominal surgery is associated with poor patient outcomes. We studied the effectiveness of a national quality improvement (QI) programme to implement a care pathway to improve survival for these patients. METHODS: We did a stepped-wedge cluster-randomised trial of patients aged 40 years or older undergoing emergency open major abdominal surgery. Eligible UK National Health Service (NHS) hospitals (those that had an emergency general surgical service, a substantial volume of emergency abdominal surgery cases, and contributed data to the National Emergency Laparotomy Audit) were organised into 15 geographical clusters and commenced the QI programme in a random order, based on a computer-generated random sequence, over an 85-week period with one geographical cluster commencing the intervention every 5 weeks from the second to the 16th time period. Patients were masked to the study group, but it was not possible to mask hospital staff or investigators. The primary outcome measure was mortality within 90 days of surgery. Analyses were done on an intention-to-treat basis. This study is registered with the ISRCTN registry, number ISRCTN80682973. FINDINGS: Treatment took place between March 3, 2014, and Oct 19, 2015. 22 754 patients were assessed for elegibility. Of 15 873 eligible patients from 93 NHS hospitals, primary outcome data were analysed for 8482 patients in the usual care group and 7374 in the QI group. Eight patients in the usual care group and nine patients in the QI group were not included in the analysis because of missing primary outcome data. The primary outcome of 90-day mortality occurred in 1210 (16%) patients in the QI group compared with 1393 (16%) patients in the usual care group (HR 1·11, 0·96-1·28). INTERPRETATION: No survival benefit was observed from this QI programme to implement a care pathway for patients undergoing emergency abdominal surgery. Future QI programmes should ensure that teams have both the time and resources needed to improve patient care. FUNDING: National Institute for Health Research Health Services and Delivery Research Programme