In this report, we explore the theory behind utility-based valuation of stock options. In particular, we focus on the underwater employee stock options, which give rise to an incomplete-market setting. We begin with basic concepts and terminology in stock-option pricing. Then, we review the valuation by replication process both in the binomial model and the Black-Scholes model. These two methods apply to valuation in the complete-market setting. Then we introduce the concept of utility function and utility maximization in the context of portfolio allocation. An example is worked out to demonstrate how to solve the optimization problem subject to a portfolio constraint. In the end, we explore indifference pricing, i.e., utility-based valuation of stock options in an incomplete single-period binomial model. / text

This thesis investigates how chief executive officer (CEO) equity incentives affect the remediation of material weaknesses (MWs) in internal control. First, we predict that the sensitivity of CEO stock and stock option portfolios to stock price (CEO price sensitivity or delta) has a positive impact on firm promptness in remedying MWs, because CEOs whose personal wealth is tied to stock price suffer losses from negative market reactions to the public disclosure of MWs. Second, we predict that the sensitivity of CEO stock option portfolio to stock-return volatility (CEO volatility sensitivity or vega) has a negative impact on firm promptness in remedying MWs, as firms with internal control weaknesses are associated with higher information and operating risks that manifest in stock return volatility. Our empirical results, based on a sample of firms disclosing MWs in internal control under the Sarbanes-Oxley Act (SOX) during November 15, 2003 and August 27, 2006, are consistent with the above predictions. We further provide evidence that an effective board of directors could mitigate the undesirable, negative impact of CEO volatility sensitivity on MWs remediation. We measure firms’ promptness in remedying MWs based on their subsequent internal control audit opinions (e.g., Ashbaugh-Skaife et al. 2008; Goh 2009); and CEO price (volatility) sensitivity as the dollar change in CEO stock and option portfolios (option portfolio) from a 1 percent change in stock price (Core and Guay 2002). This thesis is innovative with respect to the prediction and evidence of the opposing effects from CEO price and volatility sensitivities on internal control quality. This new evidence contributes to the literature that examines managerial incentives embedded in stock-based and option-based compensation plans in various economic contexts (e.g., Knopf et al. 2002; Coles et al. 2006; Low 2009; Armstrong et al. 2013). Our findings suggest that when stock constitutes a major part of CEO compensation, the mandatory disclosure requirement of SOX provides a channel for the stock market to discipline CEO. However, when options dominate CEO compensation, volatility sensitivity and the associated risk-taking incentive can cause CEOs to delay rectifying internal control deficiencies. These results have interesting policy implications for regulators and firms concerning mandatory disclosure and compensation design. Moreover, this thesis contributes to the broad literature on corporate governance by documenting an interaction between corporate governance and CEO incentives, namely that strong corporate governance mitigates the undesirable risking-taking incentive caused by CEO option holdings. Overall, this thesis deepens our understanding on mechanisms through which regulators, firm executives, and boards of directors strengthen internal control over financial reporting in the post-SOX era. / published_or_final_version / Business / Doctoral / Doctor of Philosophy

Not available / text

Thesis (Ph. D.)--University of Texas at Austin, 2006. / Vita. Includes bibliographical references.

Thesis (Ph. D.)--University of Texas at Austin, 2004. / Supervisor: Sheridan Titman. Vita. Includes bibliographical references.

Submitted by Augusto Carvalho (carvalhoaugusto@hotmail.com) on 2016-06-15T03:04:18Z No. of bitstreams: 1 dissertacao_formatada__ficha.pdf: 435416 bytes, checksum: d8adc0470bf4fe6452ae8e18ac1464f2 (MD5) / Approved for entry into archive by Letícia Monteiro de Souza (leticia.dsouza@fgv.br) on 2016-06-15T12:08:58Z (GMT) No. of bitstreams: 1 dissertacao_formatada__ficha.pdf: 435416 bytes, checksum: d8adc0470bf4fe6452ae8e18ac1464f2 (MD5) / Made available in DSpace on 2016-06-15T12:11:29Z (GMT). No. of bitstreams: 1 dissertacao_formatada__ficha.pdf: 435416 bytes, checksum: d8adc0470bf4fe6452ae8e18ac1464f2 (MD5) Previous issue date: 2016 / What is the effect of elections on real assets? Can we measure the effect on price only observing one outcome? This dissertation attempts to estimate these effects using a methodology based in stock options. The model developed adapts the benchmark Black-Scholes model to incorporate two new parameters: a perfectly anticipated jump in price (∆) and a series of daily probabilities (Θ) reflecting beliefs about outcomes of the election. We apply this method to 2014 Brazilian Presidential Elections and Petrobras - an important oil company in Brazil - using market data from the second election round. The results found show 65-77% difference in company valuation, depending on election outcome. This is equivalent to approximately 2.5% of Brazil’s GDP in 2014. / Qual o efeito de eleições em ativos reais? É possível mensurar diretamente a diferença de preços mesmo que só possamos enxergar um dos resultados potenciais? Essa dissertação estima esses efeitos utilizando metodologia baseada em opções sobre ações. O modelo aqui desenvolvido adaptção tradicional Black-Scholes para incorporar dois novos parâmetros: um salto no preço do ativo perfeitamente antecipado e uma série de probabilidades diárias refletindo as crenças sobre quem venceria a corrida eleitoral. Aplicamos esse método para o caso brasileiro das Eleições Presidenciais de 2014 e a Petrobras - uma importante companhia do setor petrolífero do país -utilizando dados de bolsa do segundo turno das eleições. Os resultados encontrados mostram uma diferença de 65-77% para o valor da companhia, dependendo de quem vencesse nas urnas. Isso é equivalente a aproximadamente 2.5% do PIB de 2014 do país.

One way a multinational corporation can further satisfy its primary objective, which is to maximize shareholder wealth, is to minimize the share of its income that is transferred through taxation to the various sovereign nations within which it does business. The profit maximizing firm attempts to maximize (minimize) taxable income in those jurisdictions where income tax burdens are the least (most) in such a way as to diminish the present value of its global total tax burden. While the US corporate income tax rate has remained relatively stable over the decades since most US income tax rates were last slashed as part of the Tax Reform Act of 1986, across the rest of the world, non-US corporate income tax rates have continued to fall. Even though the US statutory rate was among the lowest corporate income tax rates of any industrialized nation in 1988, by 2008, due to continuing rate decreases around the globe the US rate had become one of the highest corporate income tax rates amongst the G-8. In April of 2012, the US statutory rate as applied to corporate income became the highest among all the Organization for Cooperation and Economic Development (OECD) countries. This study will examine the behavior of option intensive corporations during the late 1990's. Coinciding with the longest recorded economic expansion in the history of the United States and coupled with the so-called "internet bubble" during the second half of the decade, this period of rapid stock price appreciation was also a time when many highly profitable companies faced substantially lower current US tax liabilities due to the large tax deductions resulting from the employee exercise of increasing quantities of non-qualified stock options at substantial gains. Enormous tax losses reported by employee stock option granting firms were sufficient to eliminate not only current US corporate income tax liabilities but also several years of future tax liabilities for some firms. Previous research has documented an increasing proportion of US multinational corporate income recognized in foreign jurisdictions, thereby escaping the relatively high US corporate tax rates until the foreign profits are repatriated back into the US. Perhaps US corporate income tax rates are so high in comparison to equally suitable substitute foreign locations that many firms have relocated their income producing activities to lower taxed jurisdictions abroad. Or it may be that US multinational firms engage in various cross border income shifting techniques to avoid high US corporate income tax rates and reduce their overall global tax burden. Profitable option intensive firms in the late 1990's faced in effect lower US corporate income tax rates due to their extensive employee stock option deductions and resulting net operating loss carry-forwards. It is possible that these firms had more incentive to recognize income domestically than their non-option intensive corporate peers. Using a sample of the largest US firms comprising the NASDAQ-100 index on May 31, 2001, this study found evidence of higher US profitability among NASDAQ-100 multinational firms with the largest deductions resulting from the exercise of options by their employees during the 1997 - 2000 fiscal years suggesting that these firms where more likely to recognize or even generate income within US borders when facing effectively lower US corporate income tax rates. Such an observation has potential public policy implications and contributes to the literature on tax motivated income shifting behavior.

ix, 69 p. A print copy of this thesis is available through the UO Libraries. Search the library catalog for the location and call number. / In this dissertation I investigate whether managers alter the linguistic tone of their earnings announcements to increase the value of their stock options. Empirical research finds evidence that managers use optimistic tone to signal future firm performance. However, prior literature also finds a positive relation between optimistic tone in earnings announcements and short-window abnormal returns. The market reaction to optimistic tone suggests that managers can profit from using pessimistic tone to lower the firm's stock price prior to option grants and optimistic tone to increase the stock price prior to option exercises. I hypothesize that managers adjust the tone of their earnings announcements to increase the value of their stock options. In addition, I hypothesize that managers will alter the tone to increase option payouts when the costs of doing so (proxied by litigation risk) are low and when the financial reporting incentives to do so (proxied by earnings management) are high. I test these predictions using 17,211 firm-quarter observations from 1998-2006. In my tests I regress the tone of the earnings announcement on its known determinants and indicators for a stock option grant or exercise shortly following the announcement. I do not find evidence that managers, on average, alter the tone of earnings announcements prior to option grants or exercises. However, I find that managers decrease optimistic tone prior to option grants when they also record low discretionary accruals, which suggests that altering tone and managing earnings are complementary strategies to move stock price. I also find that managers increase optimistic tone prior to option exercises when litigation risk is low, but decrease optimistic tone prior to option exercises when litigation risk is high. Further analysis indicates the litigation risk results hold only after the Sarbanes-Oxley Act of 2002. Overall, my evidence suggests that managers increase optimistic tone prior to option exercises except when a high threat of litigation constrains such opportunism. When managers do alter tone, the average financial gain is small relative to their total compensation. / Committee in charge: Steven Matsunaga, Chairperson, Accounting; Angela Davis, Member, Accounting; David Guenther, Member, Accounting; Jeremy Piger, Outside Member, Economics

As startups vêm provocando uma mudança profunda no mundo dos negócios, e a cada ano mais startups são fundadas no Brasil. O sucesso destas empresas não depende exclusivamente do desenvolvimento de um produto/serviço inovador e um modelo de negócio escalável, mas também da aplicação de ferramentas de incentivo de longo prazo que permitam a formação de times de alto desempenho altamente engajados, e o controle do caixa, que nos primeiros anos é tipicamente escasso dadas as características de risco destes novos negócios. No entanto, o desconhecimento de ferramentas de incentivo de longo prazo por parte dos empreendedores e a limitada discussão na literatura do seu efeito conjunto nas dimensões de pessoas e financeira faz com que muitas startups não implementem tais planos nos seus primeiros anos de existência, o que pode afetar diretamente o sucesso do negócio. Mecanismos inovativos de incentivo, como as opções fantasmas (phantom stock options), são particularmente desconhecidos e pouco aplicados no contexto brasileiro de startups. O objetivo deste trabalho é desenvolver um plano de incentivo de longo prazo baseado em opções fantasmas em uma startup, bem como gerar conhecimento para apoiar futuras pesquisas acadêmicas no campo. Este objetivo foi atingido por meio de uma pesquisa-ação e os resultados confirmaram a importância desta ferramenta para a atração de talentos, engajamento do time, redução de exposição de caixa e redução de assimetria da informação na empresa, já que o profissional passa a entender e mensurar o valor de sua contribuição individual para a equipe e, consequentemente, para o atingimento do seu bônus. / Startups have been bringing about a profound change in the business world, and each year more startups are founded in Brazil. The success of these companies does not depend exclusively on the development of an innovative product / service and a scalable business model, but also on the application of long-term incentive tools that allow the formation of highly engaged high performance teams and cash control, which in the early years is typically scarce given the risk characteristics of these new businesses. However, the lack of knowledge of long-term incentive tools on the part of entrepreneurs and the limited discussion in the literature of their combined effect on the human and financial dimensions means that many startups do not implement such plans in their early years of existence. Can directly affect the success of the business. Innovative incentive mechanisms, such as phantom stock options, are particularly unknown and little applied in the Brazilian context of startups. The purpose of this paper is to illustrate the creation and implementation of a long-term incentive plan based on phantom options in a startup, as well as generate knowledge to support future academic research in the field. This objective was reached through an action research and the results confirmed the importance of this tool for the attraction of talents, team engagement, reduction of cash exposure and reduction of asymmetry of information in the company, since the professional comes to understand and measure the value of your individual contribution to the team and, consequently, to the attainment of your bonus.

abstract: The purpose of this research is to efficiently analyze certain data provided and to see if a useful trend can be observed as a result. This trend can be used to analyze certain probabilities. There are three main pieces of data which are being analyzed in this research: The value for δ of the call and put option, the %B value of the stock, and the amount of time until expiration of the stock option. The %B value is the most important. The purpose of analyzing the data is to see the relationship between the variables and, given certain values, what is the probability the trade makes money. This result will be used in finding the probability certain trades make money over a period of time. Since options are so dependent on probability, this research specifically analyzes stock options rather than stocks themselves. Stock options have value like stocks except options are leveraged. The most common model used to calculate the value of an option is the Black-Scholes Model [1]. There are five main variables the Black-Scholes Model uses to calculate the overall value of an option. These variables are θ, δ, γ, v, and ρ. The variable, θ is the rate of change in price of the option due to time decay, δ is the rate of change of the option’s price due to the stock’s changing value, γ is the rate of change of δ, v represents the rate of change of the value of the option in relation to the stock’s volatility, and ρ represents the rate of change in value of the option in relation to the interest rate [2]. In this research, the %B value of the stock is analyzed along with the time until expiration of the option. All options have the same δ. This is due to the fact that all the options analyzed in this experiment are less than two months from expiration and the value of δ reveals how far in or out of the money an option is. The machine learning technique used to analyze the data and the probability is support vector machines. Support vector machines analyze data that can be classified in one of two or more groups and attempts to find a pattern in the data to develop a model, which reliably classifies similar, future data into the correct group. This is used to analyze the outcome of stock options. / Dissertation/Thesis / Masters Thesis Computer Science 2015