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| Author: | Carpenter, J. N. |
| Title: | The exercise and valuation of executive stock options. |
| Journal: | Journal of Financial Economics
1998 : MAY, VOL. 48:2, p. 127-158 |
| Index terms: | OPTIONS PROFIT UTILITY THEORY |
| Language: | eng |
| Abstract: | In theory, hedging restrictions faced by managers make executive stock options more difficult to value than ordinary options, because they imply that exercise policies of managers depend on their preferences and endowments. Using data on option exercises from 40 firms, this paper shows that a simple extension of the ordinary American option model which introduces random, exogenous exercise and forfeiture predicts actual exercise times and payoffs just as an elaborate utility- mazimizing model that explicitly accounts for the nontransferability of options. The simpler model could therefore be more useful than the preference-based model for valuing executive options in practice. |
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