Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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badnewsforstockholders.Infact,ifweviewoptiongrantsas
compensation, they are part of the normal cost of doing
business for a young firm with a cash flow problem.
Consequently,newsofoptiongrantsbythemselvesshouldbe
neither good nor bad news to markets.



  1. Pricereaction to option exercise. Garvey and Milbourn
    (2002)examinehowstockpricesreacttothedilutionthatis
    caused when options are exercised.
    28 Theyarguethatinanefficientmarketthatincorporatesthe
    potential dilution from option exercise, the actualexercise
    shouldbeanoneventwithnostockpriceconsequences.What
    theyfind, however, isthat stock pricesreact negativelyto
    option-exercise-associated dilution, which they see as
    evidence that markets do not fully incorporate the option
    overhang. This may not necessarily be true, since option
    exercise, by itself, conveys information to the market. In
    particular,alargenumberofoptionexercisesbyemployees
    canbeviewedasasignalthattheybelievethatthestockis
    overvalued.


3.Marketvalueandoptionoverhang.LiandWong (2004)
examinedthemarketvaluationofcompanieswithemployee
stock options.
29 They find that the market price is in fact lower for
companieswithsubstantialoverhang(byabout 6 percent)and
thatadjustingforemployeestockoptionsinvaluationyields
valuesthatareclosertothemarketprices.Thiscanbeviewed
asevidencethatmarketsdoconsiderthevalueofoutstanding
options when valuing companies.


Thisdebatehasbecomemoreintensewiththepotentialshift
inaccountingrulesin2006,requiringcompaniestoexpense

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