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The Value of Stock Options to Non-Executive Employees

  • Kevin F. Hallock
  • Craig Olson

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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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
Note: CF LS
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  4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
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  8. Guilkey, David K. & Murphy, James L., 1993. "Estimation and testing in the random effects probit model," Journal of Econometrics, Elsevier, vol. 59(3), pages 301-317, October.
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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.
  18. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
  19. Vassilis A. Hajivassiliou & Daniel McFadden, 1990. "The Method of Simulated Scores for the Estimation of LDV Models with an Application to External Debt Crisis," Cowles Foundation Discussion Papers 967, Cowles Foundation for Research in Economics, Yale University.
  20. 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.
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