Skip to content Skip to navigation
University of Warwick
  • Study
  • |
  • Research
  • |
  • Business
  • |
  • Alumni
  • |
  • News
  • |
  • About

University of Warwick
Publications service & WRAP

Highlight your research

  • WRAP
    • Home
    • Search WRAP
    • Browse by Warwick Author
    • Browse WRAP by Year
    • Browse WRAP by Subject
    • Browse WRAP by Department
    • Browse WRAP by Funder
    • Browse Theses by Department
  • Publications Service
    • Home
    • Search Publications Service
    • Browse by Warwick Author
    • Browse Publications service by Year
    • Browse Publications service by Subject
    • Browse Publications service by Department
    • Browse Publications service by Funder
  • Help & Advice
University of Warwick

The Library

  • Login
  • Admin

The value of being lucky : option backdating and non-diversifiable risk

Tools
- Tools
+ Tools

Henderson, Vicky, Sun, Jia and Whalley, A. Elizabeth (2021) The value of being lucky : option backdating and non-diversifiable risk. International Journal of Theoretical and Applied Finance, 24 (4). 2150023. doi:10.1142/S0219024921500230

[img]
Preview
PDF
WRAP-Value-being-lucky-option-backdating-no-diversifiable-risk-2021.pdf - Accepted Version - Requires a PDF viewer.

Download (933Kb) | Preview
Official URL: https://doi.org/10.1142/S0219024921500230

Request Changes to record.

Abstract

The practice of executives influencing their option compensation by setting a grant date retrospectively is known as backdating. Since executive stock options are usually granted at-the-money, selecting an advantageous grant date to coincide with a low stock price will be valuable to an executive. Empirical evidence shows that backdating of executive stock option grants was prevalent, particularly at firms with highly volatile stock prices. Executives who have the opportunity to backdate should take this into account in their valuation. We quantify the value to a risk averse executive of a lucky option grant with strike chosen to coincide with the lowest stock price of the month. We show the ex ante gain to risk averse executives from the ability to backdate increases with both risk aversion and with volatility, and is significant in magnitude. Our model involves valuing the embedded partial American lookback option in a utility indifference setting with key features of risk aversion, inability to diversify and early exercise.

Item Type: Journal Article
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
Q Science > QA Mathematics
Divisions: Faculty of Science, Engineering and Medicine > Science > Statistics
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Nonlinear pricing, Nonlinear pricing -- Mathematical models, Prices -- Statistical methods, Options (Finance) -- Prices -- Mathematical models, Employee stock options -- Valuation -- Mathematical models
Journal or Publication Title: International Journal of Theoretical and Applied Finance
Publisher: World Scientific Publishing Co. Pte. Ltd.
ISSN: 0219-0249
Official Date: 16 July 2021
Dates:
DateEvent
16 July 2021Published
7 June 2021Accepted
Volume: 24
Number: 4
Article Number: 2150023
DOI: 10.1142/S0219024921500230
Status: Peer Reviewed
Publication Status: Published
Reuse Statement (publisher, data, author rights): Electronic version of an article published as International Journal of Theoretical and Applied Finance, 24 (4). 2150023. 2021 https://doi.org/10.1142/S0219024921500230 © [copyright World Scientific Publishing Company] https://www.worldscientific.com/worldscinet/ijtaf
Access rights to Published version: Restricted or Subscription Access
Related URLs:
  • Publisher

Request changes or add full text files to a record

Repository staff actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics

twitter

Email us: wrap@warwick.ac.uk
Contact Details
About Us