Executive stock options [Elektronische Ressource] : exercises and valuation / Daniel Klein

Informations

• Publié par: universitat_mannheim
• Publié le: 01 janvier 2010
• Nombre de lectures: 34
• Poids de l'ouvrage: 1 Mo

Extrait

Daniel Klein
Executive Stock Options: Exercises and Valuation
Inauguraldissertation
zur Erlangung des akademischen Grades
eines Doktors der Wirtschaftswissenschaften
der Universität Mannheim
Vorgelegt im Frühjahrssemester 2010Dekan: Dr. Jürgen M. Schneider
Referent: Professor Ernst Maug, Ph.D.
Korreferent: Pofessor Dr. Christian Hofmann
Tag der Disputation: 11. November 2010Contents
I Introduction 7
1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2 Valuation of executive stock options . . . . . . . . . . . . . . . . . . . 9
3 Outline of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
II Executive Turnover and the Valuation of Stock Options 17
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.1 Data on executive turnover . . . . . . . . . . . . . . . . . . . . 23
2.2 Data on voluntary exercises . . . . . . . . . . . . . . . . . . . 25
3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4 Executive turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.1 Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2 Personal characteristics . . . . . . . . . . . . . . . . . . . . . . 35
4.3 Firm characteristics . . . . . . . . . . . . . . . . . . . . . . . . 42
4.4 Robustness checks . . . . . . . . . . . . . . . . . . . . . . . . . 44
5 Voluntary Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5.1 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.2 Robustness checks . . . . . . . . . . . . . . . . . . . . . . . . . 50
16 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
A Technical details for simulation and valuation . . . . . . . . . . . . . 61
Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
III How Do Executives Exercise Their Stock Options? 73
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4 Hypothesis development and analysis . . . . . . . . . . . . . . . . . . 89
4.1 Utility theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.2 Option portfolio effects . . . . . . . . . . . . . . . . . . . . . . 92
4.3 Behavioral explanations . . . . . . . . . . . . . . . . . . . . . . 97
4.4 Asymmetric information . . . . . . . . . . . . . . . . . . . . . 100
4.5 Institutional variables and constraints . . . . . . . . . . . . . . 102
4.6 Control variables . . . . . . . . . . . . . . . . . . . . . . . . . 103
4.7 Overall evaluation . . . . . . . . . . . . . . . . . . . . . . . . . 105
5 Robustness checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.1 Research design . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.2 Specification issues . . . . . . . . . . . . . . . . . . . . . . . . 109
6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
IV Fractional Exercises of Executive Stock Options 124
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
22 The model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
2.1 Base model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
2.2 Fractional exercise . . . . . . . . . . . . . . . . . . . . . . . . . 133
3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
3.1 Exercise policy . . . . . . . . . . . . . . . . . . . . . . . . . . 137
3.2 Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
3.3 Comparative statics . . . . . . . . . . . . . . . . . . . . . . . . 143
4 Empirical analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
4.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
4.2 Descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . 150
4.3 Exercise policy . . . . . . . . . . . . . . . . . . . . . . . . . . 151
4.4 Relevance of fractional exercise . . . . . . . . . . . . . . . . . 155
4.5 Alternative motivations for fractional exercise . . . . . . . . . 157
5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
A Binomial tree approach . . . . . . . . . . . . . . . . . . . . . . . . . . 162
A.1 Moves in the tree for equal probabilities . . . . . . . . . . . . . 162
A.2 Wealth portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . 162
A.3 Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
References 171
3List of Figures
II.1 Empirical turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
III.1 Partial exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
III.2 Empirical hazard rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
III.3 Optimality of exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
IV.1 Exercise boundaries for different levels of wealth . . . . . . . . . . . . . . 133
IV.2 Fractional exercise policy . . . . . . . . . . . . . . . . . . . . . . . . . . 134
IV.3 Subjective delta over time . . . . . . . . . . . . . . . . . . . . . . . . . . 141
IV.4 Subjective delta after 5 years for different stock prices . . . . . . . . . . 142
IV.5 Early exercised fraction sizes . . . . . . . . . . . . . . . . . . . . . . . . 151
4List of Tables
II.1 Sample construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
II.2 Key financial firm statistics . . . . . . . . . . . . . . . . . . . . . . . . . 64
II.3 Variable definitions and data sources for the turnover analysis . . . . . . 65
II.4 Descriptive statistics on executive employment relations . . . . . . . . . 67
II.5 Turnover rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
II.6 Turnover robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
II.7 Variable definitions and data sources for the analysis of voluntary exercises 70
II.8 Descriptive statistics on option packages . . . . . . . . . . . . . . . . . . 70
II.9 Voluntary exercise rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
II.10 Simulation results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
III.1 Sample design from raw IFDF data to our final sample . . . . . . . . . . 114
III.2 Option characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
III.3 Reasons for right censoring . . . . . . . . . . . . . . . . . . . . . . . . . 115
III.4 Variable definitions and data sources . . . . . . . . . . . . . . . . . . . . 115
III.5 Descriptive statistics on option packages . . . . . . . . . . . . . . . . . . 119
III.6 Hazard rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
III.7 Likelihood-ratio tests for groups of variables . . . . . . . . . . . . . . . . 121
III.8 Research design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
5III.9 Specification issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
IV.1 Stock price at early exercise . . . . . . . . . . . . . . . . . . . . . . . . . 167
IV.2 Time to early exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
IV.3 Option values and incentives . . . . . . . . . . . . . . . . . . . . . . . . . 168
IV.4 Variable definitions and data sources . . . . . . . . . . . . . . . . . . . . 169
IV.5 Univariate statistics on option exercises . . . . . . . . . . . . . . . . . . . 169
IV.6 Exercise thresholds and fractional exercise . . . . . . . . . . . . . . . . . 170
IV.7 Fractional exercise versus complete exercise . . . . . . . . . . . . . . . . 170
6Chapter I
Introduction
1 Overview
This dissertation analyzes early exercises of executive stock options and their impact
on option valuation. Executive stock options (ESOs) are usually American style call
options that companies grant to their executives as a performance based component of
compensation packages. For the valuation of American options the exercise behavior
plays a crucial role. Those options can be exercised before maturity and give thus more
choice to the option holder compared to European options that can only be exercised at
maturity.
How executives exercises ESOs is, however, in various respects different from how
other investors would exercise comparable financial options. For instance, ESOs are often
exercised before maturity even if the underlying stock does not pay dividends, which
would be suboptimal for American options that are held by diversified investors. This
makes usual valuation methods inapplicable for ESOs. The crucial difference between
ESOs and most other financial options is, however, that ESOs are not traded on the open
market. Thus, the only possibility for