Employee Stock Option Exercises: An Empirical Analysis

This paper describes the exercise behavior of over 50,000 employees who hold long term options on employer stock at eight corporations. Exercise is strongly associated with recent stock price movements, the market-to-strike ratio, proximity to vesting dates, time to maturity, and volatility. Much of the exercise activity occurs years before the options expire. Employees commonly sacrifice half of the Black-Scholes value by exercising before expiration. The employee's level within the company explains, in part, differences in behavior. These findings have implications for the FASB as it develops a new disclosure standard for stock compensation.