Employee Stock Options

Posted: 1 Sep 1999

See all articles by Steven J. Huddart

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting

Date Written: June 1994

Abstract

This paper examines the valuation of employee stock options (ESOs). Because ESOs are inalienable, the employee's optimal exercise policy differs from the policy a naive reading of the finance literature would suggest. The employee prefers to exercise options before maturity under certain conditions on risk aversion, investment opportunities, and wealth. Since the ESO's cost to the employer depends on the employee's exercise policy, this finding has implications for changes to the accounting treatment of ESOs under consideration by the Financial Accounting Standards Board. Numerial examples suggest the employer's cost is much less than the options' Black-Scholes value.

JEL Classification: G12, M41, C61

Suggested Citation

Huddart, Steven J., Employee Stock Options (June 1994). Available at SSRN: https://ssrn.com/abstract=5440

Steven J. Huddart (Contact Author)

Pennsylvania State University, University Park - Department of Accounting ( email )

University Park, PA 16802-3603
United States
814-863-0448 (Phone)

HOME PAGE: http://directory.smeal.psu.edu/sjh11

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