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Liquidity and employee options: An empirical examination of the Microsoft experience


  • Chance, Don M.


In recent years several companies have offered employees the opportunity to transfer certain out-of-the-money options to a dealer. This paper examines one such high-profile program offered by Microsoft in 2003. The program was not very transparent in that employees were forced to decide whether to tender their options before knowing how much they would be offered, and it had only a modest rate of participation. Nonetheless, the market easily absorbed intense selling pressure as the options were transferred and hedged. The dealer, JPMorgan Chase, though profiting from the transfer, apparently failed to hedge the volatility risk it accepted from the employees and lost nearly the entire value it paid for the options. The overall experience has important implications for the design of programs that are intended to solve problems of low morale and increased turnover caused by underwater options.

Suggested Citation

  • Chance, Don M., 2009. "Liquidity and employee options: An empirical examination of the Microsoft experience," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 469-487, September.
  • Handle: RePEc:eee:corfin:v:15:y:2009:i:4:p:469-487

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    References listed on IDEAS

    1. Menachem Brenner, 2001. "The Price of Options Illiquidity," Journal of Finance, American Finance Association, vol. 56(2), pages 789-805, April.
    2. Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors and Stock Option Exercise," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 601-627.
    3. Detemple, Jerome & Sundaresan, Suresh, 1999. "Nontraded Asset Valuation with Portfolio Constraints: A Binomial Approach," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 835-872.
    4. 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.
    5. Carter, Mary Ellen & Lynch, Luann J., 2004. "The effect of stock option repricing on employee turnover," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 91-112, February.
    6. Core, John E. & Guay, Wayne R., 2001. "Stock option plans for non-executive employees," Journal of Financial Economics, Elsevier, vol. 61(2), pages 253-287, August.
    7. Holland, Larry C. & Elder, Erick M., 2006. "Employee stock options in compensation agreements: A financing explanation," Journal of Corporate Finance, Elsevier, vol. 12(2), pages 367-379, January.
    8. Huddart, Steven & Lang, Mark, 1996. "Employee stock option exercises an empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 5-43, February.
    9. Brian J. Hall, 2004. "Transferable Stock Options (Tsos) And The Coming Revolution In Equity-Based Pay," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(1), pages 8-17.
    10. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
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    Cited by:

    1. Aktas, Nihat & de Bodt, Eric & Roll, Richard, 2013. "MicroHoo: Deal failure, industry rivalry, and sources of overbidding," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 20-35.
    2. Carole Bernard & Olivier Le Courtois, 2012. "Performance Regularity: A New Class of Executive Compensation Packages," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(4), pages 353-370, November.


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