The Cost of Employee Stock Option Grants: An Empirical Analysis

Posted: 21 Oct 2002

See all articles by Carol A. Marquardt

Carol A. Marquardt

City University of New York (CUNY) – Baruch College


This study presents empirical evidence on the ex post costs of employee stock option (ESO) grants to issuing firms and examines whether the Black-Scholes [1973] model provides reasonable estimates of these values. Because there are no market prices for ESOs, the traditional avenues for testing option-pricing models are unavailable. This research relies instead on techniques from the economic forecasting literature, viewing model values as forecasts of the options' payoff. The theoretically appropriate rate at which to discount ESO payoffs is derived under the maintained hypothesis that the Black-Scholes model is valid. This rate is used in estimating ex post ESO costs at the time of grant, which are then compared with Black-Scholes estimates using Theil's [1966] tests of forecast rationality. Based on a sample of 966 ESO grants over 1963-84, the results suggest that the Black-Scholes model, adjusted for concavity in the time to exercise using the Hemmer, Matsunaga, and Shevlin [1994] procedure, appears to provide reasonable estimates of ex post ESO costs for the average ESO grant. However, there is significant variability in the amount of model error on an individual grant basis.

Keywords: employee stock options, executive compensation, option pricing, economic forecasting

JEL Classification: M41, G12, C23, C53, J33

Suggested Citation

Marquardt, Carol, The Cost of Employee Stock Option Grants: An Empirical Analysis. Journal of Accounting Research, Vol. 40, No. 4, September 2002. Available at SSRN:

Carol Marquardt (Contact Author)

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics