Skip navigation

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.
Appears in Collections:Finance Working Papers

Files in This Item:
File Description SizeFormat 
FIN-06-042.pdf223.54 kBAdobe PDFView/Open

Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.