Valuing employee stock options and restricted stock in the presence of market imperfections

Valuing employee stock options

The valuation of employee stock options (ESOs) and restricted stock units (RSUs) is problematic for both accountants and finance professionals. Most ESO valuation models use standard valuations based either on Black-Scholes or on lattice approach which have been adjusted to compensate for the special features of typical ESOs. The basis of these valuation models remains, however, the assumption of perfect markets, full employee diversification, and hedgability of the option grants.

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This paper, the first in a series sponsored by KPMG’s Global Valuation Institute introduces a simple model for the valuation of employee stock options that takes account of market imperfections.

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