How Do Managers Value Stock Options and Restricted Stock?
32 Pages Posted: 18 Mar 2005
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: Suggested Citation
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