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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26393
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| Title: | Optimal Exercise of Executive Stock Options and Implications for Firm Cost |
| Authors: | Carpenter, Jennifer N.
Stanton, Richard
Wallace, Nancy |
| Issue Date: | 5-Dec-2006 |
| Series/Report no.: | FIN-06-042 |
| Abstract: | The cost of executive stock options to shareholders has become a focus
of attention in finance and accounting. The difficulty is that the value
of these options depends on the exercise policies of the executives.
Because these options are nontransferable, the usual theory does not
apply. We analyze the optimal exercise policy for a general
utility-maximizing executive and indicate when the policy is
characterized by a critical stock price boundary. We provide a counter
example in which the executive exercises at low and high stock prices
but not in between. We show how the policy varies with risk aversion,
wealth, and volatility and explore implications for option value. For
example, option value can decline as volatility rises. |
| URI: | http://hdl.handle.net/2451/26393 |
| Appears in Collections: | Finance Working Papers
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