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Employee stock option exercises: an empirical analysis

Steven Huddart and Mark Lang

This paper describes the exercise behavior of over 50,000 employees who hold long-term 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

Journal of Accounting & Economics Volume 21, Number 1 (February 1996) 5-43

Keywords: management compensation, stock options, exercise policy, valuation.

JEL Classification: G12 J33 M41

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-3271
(814) 863-8393 fax
huddart@psu.edu
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