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stock options.48 In addition, at trial, Dr. Hakala testified
that, due to risk aversion, vesting periods, and early
terminations, most executives do not wait 10 years to exercise
their options and, as a result, on average, realize only one-half
of the Black-Scholes value. Dr. Hakala based this opinion on
academic studies and his own personal research on insider trading
and executive options. In rebuttal, Mr. Rowley testified that,
in his experience, CEOs of retail companies do not exercise their
options early or allow them to lapse.
Although we find it difficult to believe, as Mr. Rowley
suggests, that CEOs of retail companies never forfeit their stock
options, we cannot agree with respondent that a 50-percent
discount of the Black-Scholes value is appropriate. Other than
Dr. Hakala’s personal observations, respondent has not introduced
any evidence establishing that valuation experts would apply a
discount as large as 50 percent to account for risk aversion.
The articles cited by respondent do not recommend a 50-percent
discount, and, in Dr. Hakala’s report, he did not substantiate
his choice of a 50-percent discount over other possible
discounts. Moreover, Dr. Hakala did not consider the comparison
group companies’ own exercise and forfeiture patterns. Even if,
as Dr. Hakala testified, employee stock options generally realize
48See, e.g., Botosan & Plumlee, “Stock Option Expense: The
Sword of Damocles Revealed”, 15 Acct. Horizons 311 (Dec. 2001).
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