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Inattention, Forced Exercise, and the Valuation of Executive Stock OptionsHong LiuWashington University in St. Louis - Olin Business School; China Academy of Financial Research (CAFR) Ohad KadanWashington University in Saint Louis - John M. Olin Business School Jun YangIndiana University February 15, 2009 Abstract: We develop a new Black-Scholes type closed-form valuation formula for executive stock options. This formula incorporates four important unique characteristics of these options that distinguish them from standard European options: (i) The presence of the vesting period; (ii) the tendency of executives to exercise portions of their grants right at the end of the vesting period; (iii) the ability of the executives to choose optimally whether to exercise their options or keep them; and (4) executives may be forced to early exercise their options, possibly due to severe liquidity shocks or due to unexpected departure. We use an extensive executive option data set to calibrate our model. We show that the standard Black-Scholes formula significantly overestimates the value of executive stock options.
Number of Pages in PDF File: 24 Keywords: Executive Stock Options, Valuation JEL Classification: G38, M52 working papers seriesDate posted: March 17, 2008 ; Last revised: December 11, 2011Suggested CitationContact Information
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