Estimation of Employee Stock Option Exercise Rates and Firm Cost
Speaker
Abstract
| This paper is the first to perform a comprehensive estimation of employee stock option exercise behavior and option cost to firms. We develop a GMM-based methodology, robust to heteroskedasticity and correlation across exercises, for estimating the rate of voluntary option exercise as a function of the stock price path and of various firm and option holder characteristics. We use it to estimate an exercise function for a sample of 1.4 million employee-option grants to 562,311 employees at 87 publicly-traded firms between 1980-2007. We also estimate the rate of employment termination, which determines forfeitures, cancellations, and forced exercises. We use the estimated exercise and termination functions in a simulation based valuation model to analyze the effect of different firm and option holder characteristics on option value, and show that the true value of these options can differ substantially from values calculated using the usual modified Black-Scholes approximation. |
| Jennifer N. Carpenter is an associate professor of Finance at New York University Stern School of Business. Professor Carpenter teaches an M.B.A. course on Debt Instruments and Markets and a Ph.D. course on continuous time asset pricing and portfolio choice. Professor Carpenter has been with Stern since 1995. Her primary research areas include executive stock options, fund manager compensation, survivorship bias, corporate bonds, and option pricing. She has published in numerous journals including the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, and the Journal of Business. Before coming to Stern, Professor Carpenter worked at Goldman, Sachs & Company in the fixed income division. She was a lecturer at the University of Pennsylvania. Professor Carpenter received her B.S. in Economics, M.A. in Finance, M.A. in Mathematics, and Ph.D. in Finance from the University of Pennsylvania. |
| Contact information: |
| Viorel Roscovan |
