Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5089380 | Journal of Banking & Finance | 2013 | 11 Pages |
Abstract
We adapt the Benninga et al. (2005) framework to value employee stock options (ESOs). The model quantifies non-diversification effects, is computationally simple, and provides an endogenous explanation of ESO early-exercise. Using a proprietary dataset of ESO exercise events we measure the non-marketability ESO discount. We find that the ESO value on the grant date is approximately 45% of a similar plain vanilla Black-Scholes value. The model is aligned with empirical findings of ESOs, gives an exercise boundary of ESOs and can serve as an approximation to the fair value estimation of share-based employee and executive compensation. Using the model we give a numerical measure of non-diversification in an imperfect market.
Keywords
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Economics and Econometrics
Authors
Menachem Abudy, Simon Benninga,