 Executive turnover and the valuation of stock optionsDaniel Klein Journal of Corporate Finance, 2018, vol. 48, issue C, 76-93 Abstract: This paper develops a model for the valuation of executive stock options (ESOs) considering two sources of early exercise: forced exercise due to executive turnover and voluntary exercise due to personal considerations. Using data of about 4000 US executives, I estimate separate hazard rate factor models for both sources of early exercise. In a second step, I combine both conditional hazard exercise models for the valuation of a representative ESO in a Monte Carlo simulation. Analysis of the individual valuation impact of each source of early exercise shows that turnover induced exercises are responsible for most of the valuation discount of ESOs to market traded options. This result is important as most of the current literature on ESOs concentrates solely on voluntary exercises. I further find that the common practice valuation approach suggested by the Financial Accounting Standards Board (FASB) consistently underestimates ESO values. Keywords: Executive stock options; Executive turnover; Early exercise; Executive compensation; Option valuation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:48:y:2018:i:c:p:76-93 DOI: 10.1016/j.jcorpfin.2017.09.025 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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