 Optimal exercise of executive stock options and implications for firm costJennifer Carpenter (), Richard Stanton and Nancy Wallace Journal of Financial Economics, 2010, vol. 98, issue 2, 315-337 Abstract: This paper conducts a comprehensive study of the optimal exercise policy for an executive stock option and its implications for option cost, average life, and alternative valuation concepts. The paper is the first to provide analytical results for an executive with general concave utility. Wealthier or less risk-averse executives exercise later and create greater option cost. However, option cost can decline with volatility. We show when there exists a single exercise boundary, yet demonstrate the possibility of a split continuation region. We also show that, for constant relative risk averse utility, the option value does not converge to the Black and Scholes value as the correlation between the stock and the market portfolio converges to one. We compare our model's option cost with the modified Black and Scholes approximation typically used in practice and show that the approximation error can be large or small, positive or negative, depending on firm characteristics. Keywords: Executive; stock; option; Option; value; Option; life; Exercise; policy; Dynamic; trading (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:jfinec:v:98:y:2010:i:2:p:315-337 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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