How Do Managers Value Stock Options and Restricted Stock?

32 Pages Posted: 18 Mar 2005

See all articles by Frank D. Hodge

Frank D. Hodge

University of Washington - Michael G. Foster School of Business

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Date Written: July 10, 2006

Abstract

We gather data from 77 current mid-level managers and 111 future entry-level managers, to investigate how they value stock options and restricted stock. We refer to our current and future manager groups collectively as "managers." We supplement our manager data with a dozen field interviews with senior executives. We find that managers, on average, systematically overvalue stock options relative to both the Black-Scholes (B-S) value and fair-value equivalent restricted stock grants. Thus, contrary to conventional economic thinking, many risk-averse agents do not appear to discount B-S values of options. Further, in valuing options, managers value quick vesting and extended expiration. Managers also extrapolate recently rising stock price trends to arrive at their subjective valuations of both options and restricted stock. In general, our results suggest that a combination of economic, behavioral and demographic factors explain managers' subjective valuations of options and restricted stock.

Keywords: stock options, restricted stock, managers

JEL Classification: J33, M41, M46, G13

Suggested Citation

Hodge, Frank Douglas and Rajgopal, Shivaram and Shevlin, Terry J. and Shevlin, Terry J., How Do Managers Value Stock Options and Restricted Stock? (July 10, 2006). Available at SSRN: https://ssrn.com/abstract=677438 or http://dx.doi.org/10.2139/ssrn.677438

Frank Douglas Hodge

University of Washington - Michael G. Foster School of Business ( email )

Paccar Hall 540, Box 353200
Seattle, WA 98195-3200
United States
206-616-8598 (Phone)
206-685-9392 (Fax)

Shivaram Rajgopal (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
989
Abstract Views
5,475
Rank
42,679
PlumX Metrics