Estimation of Employee Stock Option Exercise Rates and Firm Cost

30 Pages Posted: 9 Mar 2009

See all articles by Jennifer N. Carpenter

Jennifer N. Carpenter

New York University (NYU) - Department of Finance

Richard Stanton

University of California, Berkeley - Haas School of Business

Nancy Wallace

University of California, Berkeley - Real Estate Group

Multiple version iconThere are 2 versions of this paper

Date Written: February 2012

Abstract

This paper is the first to perform a comprehensive estimation of employee stock option ex- ercise behavior and option cost to firms. We develop a GMM-based methodology, robust to heteroskedasticity and correlation across exercises, for estimating the rate of voluntary option exercise as a function of the stock price path and of various firm and option holder character- istics. We use it to estimate an exercise function for a sample of 1.3 million employee-option grants to 530,266 employees at 103 publicly-traded firms between 1981–2009. We use the estimated exercise functions in a simulation based valuation model to analyze the effect of different firm and option characteristics on option value, and show that the Black-Scholes- based methods used in practice can create systematic biases.

Suggested Citation

Carpenter, Jennifer N. and Stanton, Richard H. and Wallace, Nancy E., Estimation of Employee Stock Option Exercise Rates and Firm Cost (February 2012). NYU Working Paper No. 2451/31455. Available at SSRN: https://ssrn.com/abstract=1354490

Jennifer N. Carpenter

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0352 (Phone)
212-995-4233 (Fax)

Richard H. Stanton

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Nancy E. Wallace

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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