An expanded model for the valuation of employee stock options

The unique characteristics of employee stock options make straightforward applications of traditional option pricing models questionable. This study extends the standard pricing model to account for the dilution effect, the employees' exercise pattern, and the state‐dependent employee forfeiture rate. It also performs comparative analysis of popular existing models and the proposed models. Finally, the impacts of the above‐mentioned factors on the fair value of employee stock options are investigated. The results support the claim that our models reflect the reality better than existing models. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:713–735, 2009