Major League Baseball Player Contracts: An Investigation of the Empirical Properties of Real Options

32 Pages Posted: 7 Nov 2008

See all articles by Matthew Clayton

Matthew Clayton

University of Southern California

David Yermack

New York University (NYU) - Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 2001

Abstract

We study contracts negotiated between professional baseball players and teams to investigate the use of real options in a commercial setting. Baseball contracts feature options in diverse forms, and we find that these options have significant effects on player compensation. As predicted by theory, players receive higher guaranteed compensation when they allow teams to take options on their future services, and lower salaries when they bargain for options to extend their own contracts. The apparent value of options decreases as a function of the "spread" between option exercise price and annual salary and increases as a function of the time until exercise. Implied volatility of the options lies within the range found for other assets.

Keywords: real options, baseball.

Suggested Citation

Clayton, Matthew and Yermack, David, Major League Baseball Player Contracts: An Investigation of the Empirical Properties of Real Options (September 2001). NYU Working Paper No. S-DRP-01-13, Available at SSRN: https://ssrn.com/abstract=1297052

Matthew Clayton

University of Southern California ( email )

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David Yermack

New York University (NYU) - Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~dyermack

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