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Non-marketability and the Value of Employee Stock Options

33 Pages Posted: 21 Nov 2011 Last revised: 6 Oct 2013

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration

Simon Benninga

Tel Aviv University - Faculty of Management

Date Written: Febuary 1, 2013

Abstract

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

Abudy, Menachem (Meni) and Benninga, Simon, Non-marketability and the Value of Employee Stock Options (Febuary 1, 2013). Forthcoming in the Journal of Banking and Finance. Available at SSRN: https://ssrn.com/abstract=1962507 or http://dx.doi.org/10.2139/ssrn.1962507

Menachem (Meni) Abudy (Contact Author)

Bar-Ilan University - Graduate School of Business Administration ( email )

Ramat Gan
Israel

Simon Benninga

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972-3-640-6317 (Phone)
+972-2-673-4675 (Fax)

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