Abstract Employee stock option had been discussed for long time and had become very popular topic for current corporates¡¦ financial management. The importance of its option value model becomes hot topic now. The recommended model based on FASB No. 123 may not be helpful to see its payoff distortion from risk aversion and employee exit rate factors. We choose some companies at Taiwan which use employee stock option as their financial tool and study how both risk aversion and employee exit rate impact their value with modified binomial tree method. The results show that risk aversion factor is more sensitivity and cause option payoff change its value within very narrow input range, while employee exit rate also change option value sigfincantly after 10% exit rate range. Hence. Evaluation of risk aversion and employee exit rate factors become important. Companies need to search for optimal solution of those factors to achieve optimal option valuation and its relative incentive effect in order to retain their employee.

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