What determines early exercise of employee stock options in Australia?

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Employee stock options (ESOs) are a popular way of remunerating employees. We analyse factors at the firm and option level affecting the employee's decision to exercise ESOs before they mature. Exercises over the period 1998–2004 are analysed and the key factor influencing early exercise is found to be dividends. Exercises frequently occur well before maturity, but in most cases little time value is sacrificed. Our findings have implications for the ‘fair’ valuation of ESOs in companies’ financial statements, as required by the relevant Australian accounting standard, AASB 2.

Keywords: Executive stock options; Fair value; M52; Option exercise; Option pricing

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1467-629X.2007.00211.x

Affiliations: 1: UWA Business School, The University of Western Australia, Crawley, 6009, Australia 2: Department of Financial Mathernatics, Fraunhofer Institute, Fraunhofer-Platz 1, 67663 Kaiserslautern, Germany

Publication date: June 1, 2007

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