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

Publié par

Daniel KleinExecutive Stock Options: Exercises and ValuationInauguraldissertationzur Erlangung des akademischen Gradeseines Doktors der Wirtschaftswissenschaftender Universität MannheimVorgelegt im Frühjahrssemester 2010Dekan: Dr. Jürgen M. SchneiderReferent: Professor Ernst Maug, Ph.D.Korreferent: Pofessor Dr. Christian HofmannTag der Disputation: 11. November 2010ContentsI Introduction 71 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Valuation of executive stock options . . . . . . . . . . . . . . . . . . . 93 Outline of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . 14II Executive Turnover and the Valuation of Stock Options 171 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222.1 Data on executive turnover . . . . . . . . . . . . . . . . . . . . 232.2 Data on voluntary exercises . . . . . . . . . . . . . . . . . . . 253 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 Executive turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314.1 Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334.2 Personal characteristics . . . . . . . . . . . . . . . . . . . . . . 354.3 Firm characteristics . . . . . . . . . . . . . . . . . . . . . . . . 424.4 Robustness checks . . . . . . . . . . . . . . . . . . . . . . . . . 445 Voluntary Exercise .
Publié le : vendredi 1 janvier 2010
Lecture(s) : 27
Source : D-NB.INFO/1009369776/34
Nombre de pages : 185
Voir plus Voir moins

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 executives to cash in option value before maturity is
71early exercise. Another difference to plain vanilla American options is that ESOs become
first exercisable after meeting so-called vesting requirements. Most commonly, ESOs are
cliff vested, i.e. they become vested (exercisable) after a prespecified time period (vesting
2period) beginning at the grant date. If the executive leaves the firm before vesting her
3ESOs usually forfeit. Also vested options forfeit short after the executive leaves the firm,
but the executive may exercise the option before it forfeits. As those exercises are directly
triggered by executive turnover I will refer to them as forced exercises. Understanding
how executives exercise ESOs voluntarily and when firms force exercise (or forfeiture) is
a prerequisite for the setup of a proper ESO valuation model. Reliable ESO values are
not only important for firms that have to expense ESOs as compensation costs, but also
for investors and regulators like the Financial Accounting Standards Board (FASB) that
are interested in accounting procedures to reflect economic values.
This dissertation contributes to the area of executive compensation and specifically
ESO valuation analyzing different aspects of ESO early exercises. In Chapter II, I con-
struct an empirical model for ESO valuation that accounts both for turnover as a trigger
for forced early exercise (or forfeiture) and voluntary exercise, and show that turnover
induced early exercises have a major impact on ESO valuation. In Chapter III I ana-
lyze different motivations for executives to exercise ESOs voluntarily and evaluate their
respective importance. I find that executives tend to select rationally from multiple ex-
ercisable option packages. In Chapter IV, I analyze fractional exercises, i.e. exercises of
some options that represent only a proportion of the whole option package. I build up a
theoretical model to show how the possibility of fractional exercise affects ESO valuation
1Executives can neither circumvent the sale constraint of ESOs by selling a replication portfolio of
the ESO. This would imply short sales in the employer firm’s stock which is forbidden by companies’
governance rules.
2Other vesting criteria are, for instance, performance vesting (exercise possible after the performance
target is met), or time vesting (options in an option package become ratably vested over time).
3See Dahiya and Yermack (2008) for an analysis of ESO treatments when managers retire, resign or
die.
8

Soyez le premier à déposer un commentaire !

17/1000 caractères maximum.