Why Employee Stock Options Could Be Worth Much More To The Manager

The academic discussion of the value of employee stock options has focused for a long time on the reduced value of the employee stock option to the employee. This low value is typically attributed to market incompleteness, as the employee cannot hedge the option perfectly. However, in a recent working paper, Hodder and Jackwerth (2004) argue that employee stock options are much more valuable once we take into consideration that managers (and possibly some lower level employees, too) can actually influence the risk taking of the firm. What we find is that the manager will optimally take on risks in order to increase the value of his employee stock options.publishe