Employee stock option exercises an empirical analysis

Abstract

This paper describes the exercise behavior of over 50,000 employees who hold longterm options on employer stock at eight corporations. Employees typically exercise options years before expiration, commonly sacrificing half of the Black-Scholes value. Exercise is strongly associated with recent stock price movements, the market-to-strike ratio, proximity to vesting dates, time to maturity, volatility, and the employee's level within the company. These findings have implications for compensation planners, the FASB as it develops a new accounting standard for options, and financial statement users and preparers who apply and interpret the new FASB standard.

Non-marketability and the value of employee stock options

“…Combined with the data of Table 3, the data indicates that on average the ESOs in the sample are exercised when there are nearly two-thirds to half of the option term remaining. These findings are consistent with the findings of Huddart and Lang (1996) and Carpenter et al (2009). The sectors that deviate from this early exercise pattern are the food and kindred products and the paper and allied products (SIC codes 20 and 26, respectively).…”

“…Overall, the data indicates a large variation in the ratios, both across and within sectors, with very high ratios reflecting the run-up in the stock market during our sample period. 19 Table 7: Empirical data on the stock price to exercise price ratio 20 Huddart and Lang (1996) Even after considering the variation in the stock to exercise ratio, we can see that the private pricing model estimation is within the range of all the studies that use empirical data.…”

Private Information, Earnings Manipulations, and Executive Stock-Option Exercises

“…12 Our prediction entails the assumptions that shares acquired through option exercise are sold immediately rather than retained, and that the timing of option exercises is picked by management rather than dictated exogenously by, e.g., option expiration. These two assumptions, which follow from data limitations, should not be overemphasized given our findings (Panel C of Lang 2003, footnote 1) indicating that during our sample period a typical manager sells most shares acquired through option exercise and that most exercises occur long before expiration (see, e.g., Huddart and Lang 1996). 13 Table 4 and 0 (9.2 percent), and close to zero in years -3 and -1 (year -1 result is by the construction of the sample).…”

Executive Stock Option Exercises and Inside Information

“…Seyhun (1998) also¯nds that net stock returns following insider put exercises are signi¯cantly positive. Huddart and Lang (1996)¯nd that the fraction of options from a given grant that are exercised in a given month is positively related to prior stock price performance and unrelated to subsequent stock price performance. Yermack (1997) studies option grants and concludes that boards of directors, possibly under in°uence from CEOs, time grants to top managers so that they precede positive stock price performance.…”

“…Again, however, we do not believe this is a problem. Using proprietary data on option exercises from 1985 to 1995, Huddart and Lang (1996)¯nd that most exercises occur well before expiration.…”