With companies still reluctant to expense executive stock options, a new report by two finance professors at the University of Toronto’s Rotman School of Management suggests that the methodology to determine the fair value of executive stock options set out by Accounting Standards Boards in the United States and Canada can be implemented with some enhancements.

In their report for Ontario Teachers’ Pension Plan, Prof. John Hull, the Maple Financial Group Chair in Derivatives and Risk Management, and Prof. Alan White, the Peter L. Mitchelson/SIT Investment Associates Foundation Professor of Investment Strategy, say that their enhanced version of the valuation procedures suggested in Financial Accounting Standards Board Statement 123 overcome many of the objections of industry participants to those procedures.

“We believe it is possible to properly value options, contrary to popular opinion. Profs. Hull and White provide a practical approach to the valuation problem that can be used by any public company,” said Brian Gibson, senior VP, global active equities, Ontario Teachers’ Pension Plan.

“The valuation methods suggested in FASB 123 seven years ago give reasonable results, but they can be improved upon,” said Hull. “From a valuation perspective the most difficult feature of executive stock options is that they cannot be traded and tend to be exercised earlier than similar over-the-counter or exchange-traded options. We propose an approach for dealing with this.”