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The Value of Stock Options to Non-Executive Employees

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  • Kevin F. Hallock
  • Craig Olson

Abstract

This study empirically investigates the value employees place on stock options using information from the option exercise behavior of individuals. Employees hold options for another period if the value from holding them and reserving the right to exercise them later is higher than the value of exercising them immediately and collecting a profit equal to the stock price minus the exercise price. This simple model implies the hazard describing employee exercise behavior reveals information about the value to employees of holding options another time period. We show the parameters of this model are identified with data on multiple option grants per employee and we apply this model to the disposition of options received in the 1990s by a sample of over 2000 middle-level managers from a large, established firm outside of manufacturing. Exercise behavior is modeled using a random effects probit model of monthly exercise behavior that is estimated using simulated maximum likelihood estimation methods. Our estimates show there is substantial heterogeneity (observed and unobserved) among employees in the value they place on their options. Our estimates show most employees value their options at a value greater than the option's Black-Scholes value.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11950.

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Date of creation: Jan 2006
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Handle: RePEc:nbr:nberwo:11950

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  1. Oyer, Paul & Schaefer, Scott, 2005. "Why do some firms give stock options to all employees?: An empirical examination of alternative theories," Journal of Financial Economics, Elsevier, vol. 76(1), pages 99-133, April.
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  17. Keane, Michael P, 1994. "A Computationally Practical Simulation Estimator for Panel Data," Econometrica, Econometric Society, vol. 62(1), pages 95-116, January.
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Citations

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Cited by:
  1. Hamza Bahaji, 2011. "Employee Stock Options Incentive Effects: A Cpt-Based Model," Working Papers halshs-00618477, HAL.
  2. Hamza Bahaji, 2011. "Incentives from stock option grants: a behavioral approach," Post-Print halshs-00681611, HAL.
  3. Kevin F. Hallock & Craig A. Olson, 2010. "New Data for Answering Old Questions Regarding Employee Stock Options," NBER Chapters, in: Labor in the New Economy, pages 149-180 National Bureau of Economic Research, Inc.
  4. Chris Riddell, 2010. "Comment on "New Data for Answering Old Questions Regarding Employee Stock Options"," NBER Chapters, in: Labor in the New Economy, pages 180-184 National Bureau of Economic Research, Inc.

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