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The Exercise and Valuation of Executive Stock Options

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  • Jennifer N. Carpenter

Abstract

In theory, hedging restrictions faced by managers make executive stock options more difficult to value than ordinary options, because they imply that exercise policies of managers depend on their preferences and endowments. Using data on option exercises from 40 firms, this paper shows that a simple extension of the ordinary American option model which introduces random, exogenous exercise and forfeiture predicts actual exercise times and payoffs just as well as an elaborate utility-maximizing model that explicitly accounts for the nontransferability of options. The simpler model could therefore be more useful than the preference-based model for valuing executive options in practice.

Suggested Citation

  • Jennifer N. Carpenter, 1997. "The Exercise and Valuation of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-017, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:98-017
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    Cited by:

    1. J. Nellie Liang & Steven A. Sharpe, 1999. "Share repurchases and employee stock options and their implications for S&P 500 share retirements and expected returns," Finance and Economics Discussion Series 1999-59, Board of Governors of the Federal Reserve System (U.S.).
    2. M. Hanke & K. Potzelberger, 2003. "Dilution, anti-dilution and corporate positions in options on the company's own stocks," Quantitative Finance, Taylor & Francis Journals, vol. 3(5), pages 405-415.

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