Research: Executive Stock-Based Compensation: A Case Study in Valuing Employee Stock Options and Restricted Stock Issues in a Breach of Contract Case

Dwight Steward
EmployStats


http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1562017


March 1, 2010

Abstract:
    


In
this case study, the former CEO of a large telecommunication company
filed a lawsuit against her former employer that alleged that the
company’s contract breach resulted in the loss ESO grants and
diminished the value of the vested ESOs that she held at the time of
the alleged contract breach. The former company executive also alleges
that the breach prevented her from receiving restricted company stock
shares that she believes she was entitled to under her contract with
the employer. In this paper, I present an application of the Shapiro
and O’Connor (2001) modified Black-Scholes (B-S) and the Hull-White
(2002) binomial lattice tree employee stock option (ESO) valuation
models to the valuation of breach of employment contract damages. In
addition to ESO valuation, this paper also illustrates the valuation of
restricted company stock issues and provides a discussion of the
approaches used to account for the unique valuation related issues that
arise in litigation. The case study illustrates the importance of
incorporating case specific factors, such as the plaintiff's historical
ESO exercise rates and firm specific ESO forfeiture probabilities, into
the valuation models.

Keywords: Employee Stock Options, Hull White, Stock Option Pricing, Black Scholes, Breach of Employment Contract

JEL Classifications: M52, J33, K00