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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26456
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| Title: | Optimal Exercise of Executive Stock Options and Implications for Valuation |
| Authors: | Carpenter, Jennifer N.
Stanton, Richard
Wallace, Nancy |
| Issue Date: | 7-Dec-2005 |
| Series/Report no.: | FIN-05-047 |
| 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 utility-maximizing
executive and indicate when the policy is characterized by a critical
stock price boundary. We provide a counterexample 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/2451/26456 |
| Appears in Collections: | Finance Working Papers
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