Market valuation of employee stock options

Market valuation of employee stock options This study investigates whether investors incorporate the value of a firm's outstanding employee stock options into its stock price. I estimate the outstanding options' value for a sample of firms for which outstanding fixed options exceed 5% of outstanding common shares in 1988. I find a negative correlation between the value of outstanding options and a firm's share price. The correlation is stronger (i) for the option's intrinsic value than for the option's time value, (ii) for options that are later in their vesting stage than earlier in their vesting stage, and (iii) for large firms than for small firms. In addition, the FASB's method for calculating compensation expense has no explanatory power in the presence of this paper's calculation of the options' value. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

Market valuation of employee stock options

Journal of Accounting and Economics, Volume 22 (1) – Aug 1, 1996

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0165-4101
DOI
10.1016/S0165-4101(96)00439-9
Publisher site
See Article on Publisher Site

Abstract

This study investigates whether investors incorporate the value of a firm's outstanding employee stock options into its stock price. I estimate the outstanding options' value for a sample of firms for which outstanding fixed options exceed 5% of outstanding common shares in 1988. I find a negative correlation between the value of outstanding options and a firm's share price. The correlation is stronger (i) for the option's intrinsic value than for the option's time value, (ii) for options that are later in their vesting stage than earlier in their vesting stage, and (iii) for large firms than for small firms. In addition, the FASB's method for calculating compensation expense has no explanatory power in the presence of this paper's calculation of the options' value.

Journal

Journal of Accounting and EconomicsElsevier

Published: Aug 1, 1996

References

  • The valuation and exercise of executive stock options
    Carpenter, J.
  • Valuing executive stock options with endogenous departure
    Cuny, C.; Jorion, P.
  • Employee stock options exercises: An empirical analysis
    Huddart, S.; Lang, M.
  • Designing incentive plans for unionized employees
    Latham, D.; Dossett, D.

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