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Archival and experimental evidence on employees subjective valuations of stock options

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  • Anne Farrell
  • Susan Krische
  • Karen Sedatole

Abstract

Complementing proprietary archival data with an experiment, we examine employees' subjective valuations of their employee stock options and explore a stock option education program as a mechanism for influencing those valuations. We argue that the conflicting evidence on employee subjective valuations in prior studies can be attributed in part to knowledge differences. Our archival and experimental results show most employees value their options lower than the corresponding Black-Scholes cost. We find that a stock option education program that provides descriptive information about the Black-Scholes option pricing model and quantitative information about option values using that model increases not only employees' subjective valuations but also their self-reported loyalty and motivation. We complement our primary results with analyses of the cross-sectional determinants of subjective valuations, the differential effects on valuations of different components of the education program, and the heuristics used to formulate subjective valuations.

Suggested Citation

  • Anne Farrell & Susan Krische & Karen Sedatole, 2007. "Archival and experimental evidence on employees subjective valuations of stock options," Framed Field Experiments 00114, The Field Experiments Website.
  • Handle: RePEc:feb:framed:00114
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    8. Brian A. Maris & Jo-Mae Maris & Tyler T. Yang, 2003. "The Effect of Exercise Date Uncertainty on Employee Stock Option Value," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(5-6), pages 669-698.
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    11. 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.
    12. Brian J. Hall, 2003. "Six Challenges In Designing Equity-Based Pay," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 21-33.
    13. Seppo Ikaheimo & Nuutti Kuosa & Vesa Puttonen, 2006. "'The True and Fair View' of Executive Stock Option Valuation," European Accounting Review, Taylor & Francis Journals, vol. 15(3), pages 351-366.
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