Jennifer N Carpenter
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 well as an elaborate utility-maximizing 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.
Subject: Valuation, Accounting/Financial Statements, Investment/Derivatives, Hedging
(Theoretical/Empirical)
Carpenter: (212) 998-0352 jcarpen0@stern.nyu.edu
To request a copy of this paper click here
The Finance Department Working Paper Series has been generously sponsored
by