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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26394
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| Title: | Estimation of Employee Stock Option Exercise Rates and Firm Cost: Methodology |
| Authors: | Carpenter, Jennifer N.
Stanton, Richard
Wallace, Nancy |
| Issue Date: | 15-Dec-2006 |
| Series/Report no.: | FIN-06-043 |
| Abstract: | Investors have become increasingly concerned about the cost of executive
stock options to shareholders. Because executives face hedging
constraints, standard option theory does not apply.The valuation problem
reduces to accurately characterizing the option payoff. This paper
develops a methodology for estimating option exercise and cancellation
rates as a function of the stock price path, time to expiration, and
firm and option holder characteristics. Our estimation accounts for
correlation between exercises by the same executive. Valuation proceeds
by using the estimated exercise rate function to describe the
option’s expected payoff along each stock price path and then
computing the present value of the payoff. The estimation of empirical
exercise rates also allows us to test the predictions of theoretical
models of option exercise behavior. The paper not only illustrates an
ideal valuation method for a large dataset, but also shows how to
evaluate the usefulness of some of the approximations proposed in the literature. |
| URI: | http://hdl.handle.net/2451/26394 |
| Appears in Collections: | Finance Working Papers
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