Nonmarketability and the Value of Employee Stock Options
Menachem (Meni) Abudy
Graduate School of Business Administration - Bar Ilan University
Tel Aviv University - Faculty of Management
November 1, 2011
We adapt the Benninga-Helmantel-Sarig (2005) framework to value employee stock options (ESOs). The model quantifies non-diversification effects, is computationally simple, and provides an endogenous explanation of ESO early-exercise. Using a proprietary dataset of 26,843 ESO exercise events at 67 publicly-traded firms, we measure the non-marketability ESO discount. We find that the ESO value on the grant date is approximately 45% of a similar plain vanilla Black-Scholes value. The model is aligned with empirical findings of ESOs, gives an exercise boundary of ESOs and can serve as an approximation to the fair value estimation of share-based employee and executive compensation. Using the model we give a numerical measure of non-diversification in an imperfect market.
Number of Pages in PDF File: 34
Keywords: employee stock options, under pricing
JEL Classification: G12, G32working papers series
Date posted: November 21, 2011
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