Employee Stock Option Exercise and Firm Cost
48 Pages Posted: 8 Feb 2010 Last revised: 20 Jul 2018
Date Written: July 9, 2017
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
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