Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility

Posted: 10 Nov 1998

See all articles by Wayne R. Guay

Wayne R. Guay

University of Pennsylvania - Accounting Department

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

The costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives, accounting choice, financing decisions, and the valuation of equity. We present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock-return volatility that is easily implemented using data from only the current year?s proxy statement or annual report. This method can be applied to either executive stock option portfolios or to firm-wide option plans. In broad samples of actual and simulated CEO option portfolios, we show that these proxies capture more than 99% of the variation in option portfolio value and sensitivities. Sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics, and is most severe in samples of CEOs with a large proportion of out-of-the-money options. However, the proxies' explanatory power remains above 95% in all subsamples.

Note: Previously titled "Estimating the Value of Stock Option Portfolios and Their Sensitivities to Price and Volatility"

JEL Classification: G30, J33, M41

Suggested Citation

Guay, Wayne R. and Core, John E., Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility (January 2002). Available at SSRN: https://ssrn.com/abstract=138269 or http://dx.doi.org/10.2139/ssrn.138269

Wayne R. Guay (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02138
United States

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