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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26862

Title: The Exercise and Valuation of Executive Stock Options
Authors: Carpenter, Jennifer N.
Keywords: Executive stock options
Exercise policy
Option valiation
Nontranferable option
Utility maximization
Issue Date: 21-Nov-1997
Series/Report no.: FIN-98-017
Abstract: In theory, hedging restrictions faced by managers make executive stock options more difficult to value than ordinary options, because they imply that exercise policies of managers depend on their preferences and endowments. Using data on option exercises from 40 firms, this paper shows that a simple extension of the ordinary American option model which introduces random, exogenous exercise and forfeiture predicts actual exercise times and payoffs just as well as an elaborate utility-maximizing model that explicitly accounts for the nontransferability of options. The simpler model could therefore be more useful than the preference-based model for valuing executive options in practice.
URI: http://hdl.handle.net/2451/26862
Appears in Collections:Economics Working Papers

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