Non-marketability and the value of employee stock options

Menachem Abudy, Simon Benninga

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


We adapt the Benninga et al. (2005) framework to value employee stock options (ESOs). The model quantifies non-diversification effects, is computationally simple, and provides an endogenous explanation of ESO early-exercise. Using a proprietary dataset of ESO exercise events we measure the non-marketability ESO discount. We find that the ESO value on the grant date is approximately 45% of a similar plain vanilla Black-Scholes value. The model is aligned with empirical findings of ESOs, gives an exercise boundary of ESOs and can serve as an approximation to the fair value estimation of share-based employee and executive compensation. Using the model we give a numerical measure of non-diversification in an imperfect market.

Original languageEnglish
Pages (from-to)5500-5510
Number of pages11
JournalJournal of Banking and Finance
Issue number12
StatePublished - Dec 2013

Bibliographical note

Funding Information:
We thank Tamir Fishman & Co. for providing the data used in this study, with special thanks to Yaniv Shirion from Tamir Fishman for his assistance and effort with the data. We thank the seminar participants of Oxford Financial Research Centre, University of Piraeus, the Norwegian University of Science and Technologies, BI Norwegian School of Management, University of Konstanz, University of Melbourne, Tel-Aviv University, Ben Gurion University, Bar-Ilan University, the EFMA 2010 conference and the FEBS 2012 conference. We acknowledge the financial support of the Henry Crown Institute of Business Research in Israel of Tel Aviv University.


  • Employee stock options
  • Non-marketability
  • Under pricing


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