The Value of Stock Options to Non-Executive Employees

55 Pages Posted: 13 Apr 2006 Last revised: 28 Aug 2021

See all articles by Kevin F. Hallock

Kevin F. Hallock

Cornell University; National Bureau of Economic Research (NBER)

Craig A. Olson

University of Illinois at Urbana-Champaign - School of Labor & Employment Relations

Date Written: January 2006

Abstract

This study empirically investigates the value employees place on stock options using information from the option exercise behavior of individuals. Employees hold options for another period if the value from holding them and reserving the right to exercise them later is higher than the value of exercising them immediately and collecting a profit equal to the stock price minus the exercise price. This simple model implies the hazard describing employee exercise behavior reveals information about the value to employees of holding options another time period. We show the parameters of this model are identified with data on multiple option grants per employee and we apply this model to the disposition of options received in the 1990s by a sample of over 2000 middle-level managers from a large, established firm outside of manufacturing. Exercise behavior is modeled using a random effects probit model of monthly exercise behavior that is estimated using simulated maximum likelihood estimation methods. Our estimates show there is substantial heterogeneity (observed and unobserved) among employees in the value they place on their options. Our estimates show most employees value their options at a value greater than the option's Black-Scholes value.

Suggested Citation

Hallock, Kevin F. and Olson, Craig A., The Value of Stock Options to Non-Executive Employees (January 2006). NBER Working Paper No. w11950, Available at SSRN: https://ssrn.com/abstract=877455

Kevin F. Hallock (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Craig A. Olson

University of Illinois at Urbana-Champaign - School of Labor & Employment Relations ( email )

504 East Armory Avenue
Champaign, IL 61820-6297
United States

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