Employee Stock Option Exercise and Firm Cost

48 Pages Posted: 8 Feb 2010 Last revised: 20 Jul 2018

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: July 9, 2017

Abstract

We develop an empirical model of employee-stock-option exercise that is suitable for valuation and allows for behavioral channels in the determination of employee option cost. We estimate exercise rates as functions of option, stock and employee characteristics in a sample of all employee exercises at 88 publicly traded firms, of which 27 are in the S&P 500. Increasing vesting date frequency from annual to monthly reduces option value by 11-16%. Men exercise faster than women, reducing option value by 2-4%. Top employees exercise more slowly than lower-ranked, increasing value by 2-7%. Finally, we develop an analytic valuation approximation that is much more accurate than methods used in practice.

JEL Classification: G12, G39, J33

Suggested Citation

Carpenter, Jennifer N. and Stanton, Richard H. and Wallace, Nancy E., Employee Stock Option Exercise and Firm Cost (July 9, 2017). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1548821

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 (Contact Author)

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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