Major League Baseball Player Contracts: An Investigation of the Empirical Properties of Real Options
November, 1999
Matthew Clayton and David Yermack
ABSTRACT
We study contracts negotiated between professional baseball players and teams to investigate the use of real options
in a commercial setting. Baseball contracts feature options in diverse forms, and we find that these options have
significant effects on player compensation. As predicted by theory, players receive higher guaranteed compensation
when they allow teams to take options on their future services, and lower salaries when they bargain for options
to extend their own contracts. The apparent
value of options decreases as a function of the "spread" between option exercise price and annual salary
and increases as a function of the time until exercise.
Subject: Capital Budgeting
Classification: Empirical
Yermack: (212) 998-0357 dyermack@stern.nyu.edu
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