Correspondence: Themis D Pantos, Accounting and Finance Department, College of Business, San Jose State University, One Washington Square, San Jose CA, 95192-0066, USA. Tel: (408) 924-3472; Fax: (408) 924-3463

¹Dr Marco Pagani is an assistant professor of finance in the Department of Accounting and Finance at San Jose State University, San Jose, USA. Professor Pagani received his PhD in Finance from Georgia State University, Atlanta, USA; his MSc in Finance from HEC, University of Montreal, Montreal, Canada; and his BBA from the University Lyon II, Lyon, France. Dr Pagani's research and teaching interests are in the areas of Investments, Capital Markets and Institutions, and Derivative Securities.

²Dr Themis D. Pantos is an associate professor of finance in the Department of Accounting and Finance, College of Business, at the San Jose State University, California, USA. He has published numerous articles in various peer-reviewed finance, taxation and economics journals. Dr Pantos' research and teaching interests are in the areas of Capital Markets and Institutions, International Finance and Derivative Securities.

Received 7 February 2008; Revised 7 February 2008.

Abstract

Pantos et al. (2003) argue that there exists an alternative class of theoretical models that yield better results, in relation to employee stock options (hereafter, ESOs) valuation, than those obtained by the Black and Scholes and the Binomial model. In this paper, the option valuation estimates yielded by the three models are contrasted and compared for efficiency, reliability and robustness. The results indicate that the Black and Scholes and the Binomial Model overestimate the ESOs valuation. Furthermore, the results stipulate that when the concepts of forfeiture, marketability, transferability and turnover rate are taken into consideration at the grant date, the estimates yielded by the theoretical model developed by Pantos (2005) are superior to the estimates obtained by the employment of the aforementioned models.