Non-marketability and the Value of Employee Stock Options
33 Pages Posted: 21 Nov 2011 Last revised: 6 Oct 2013
Date Written: Febuary 1, 2013
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 ESO exercise events 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.
Keywords: employee stock options, under pricing
JEL Classification: G12, G32
Suggested Citation: Suggested Citation