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Employees’ Perceived Values of Their Stock Option Holdings: How Training Affects the Cost-Value Gap
Anne M. Farrell, University of Illinois at Urbana - Champaign
Susan D. Krische, University of Illinois at Urbana - Champaign
Karen L. Sedatole, Michigan State University
ABSTRACT. Analyzing unique data from an equity compensation service provider, we examine how employee stock option recipients perceive the value of their own option holdings and explore an educational training program as a mechanism for changing employees’ perceived values of their options. Results show most employees perceive their options as less valuable than the corresponding Black-Scholes cost. Importantly, we find that a training program which clearly articulates the economic fair value of employees’ options increases both their perceived values and their confidence in related decision-making. We complement the proprietary data with an experiment that manipulates components of the educational training program. We find the same before- and after-training patterns of perceived values with our experiment participants as we find for the employee recipients, and analyze the effects of the manipulations to provide additional evidence on how training changes perceptions of option value.
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