New Study on Exercising Stock Options

A new study by Steven Huddart at the University of Michigan and Mark Lang of the University of North Carolina concludes that employees often exercise their options early, thus failing to maximize the theoretical value of the grant. The study was based on the behavior of over 50,000 employees at eight companies participating in broad stock option programs. While behavior varied considerably from firm to firm, rapid increases in stock price were an important trigger for employee decisions. The study suggests that option valuation models that assume people will get the full theoretical value of an option are incorrect.