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Employee Stock Option Exercise and Firm Cost

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  • JENNIFER N. CARPENTER
  • RICHARD STANTON
  • NANCY WALLACE

Abstract

We develop an empirical model of employee stock option exercise that is suitable for valuation and allows for behavioral channels. We estimate exercise rates as functions of option, stock, and employee characteristics using all employee exercises at 88 public firms, 27 of them in the S&P 500. Increasing vesting frequency from annual to monthly reduces option value by 11% to 16%. Men exercise faster, reducing value by 2% to 4%, while top employees exercise slower, increasing value by 2% to 7%. Finally, we develop an analytic valuation approximation that is more accurate than methods used in practice.

Suggested Citation

  • Jennifer N. Carpenter & Richard Stanton & Nancy Wallace, 2019. "Employee Stock Option Exercise and Firm Cost," Journal of Finance, American Finance Association, vol. 74(3), pages 1175-1216, June.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:3:p:1175-1216
    DOI: 10.1111/jofi.12752
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    Cited by:

    1. Ammar Ali Gull & Asif Saeed & Muhammad Tahir Suleman & Rizwan Mushtaq, 2022. "Revisiting the association between environmental performance and financial performance: Does the level of environmental orientation matter?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1647-1662, September.
    2. Guthrie, Graeme & Stannard, Tom, 2020. "Easy money? Managerial power and the option backdating game revisited," Journal of Banking & Finance, Elsevier, vol. 118(C).
    3. Chen, Hsuan-Chi & Chou, Robin K. & Lu, Chien-Lin, 2021. "Misvaluation and the corporate propensity to hold cash," Journal of Corporate Finance, Elsevier, vol. 70(C).

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