Exercise Behavior And Valuation of Swedish Employee Stock Options & Warrants

Abstract

We examine the valuation of employee stock options (ESOs) and warrants (EWs) in Sweden, finding that both instruments suffer from severe deadweight costs and pricing inefficiencies. Analyzing 215 exercise transactions and 43 firm-disclosed incentive programs from OMX Stockholm (2019–2026), we show that standard Black-Scholes models misprice both firm grant costs and employee perceived value. Critically, risk aversion, non-hedgeability, the Swedish tax wedge and early exercise drive a median deadweight cost of 66–70 per cent: for every dollar spent by firms, employees value the grant at only 30–34 cents. As a supplementary analysis, weincorporatenon-normalityintothevaluationframeworkandfindthatwhileSwedish equity returns uniformly reject normality (median tail index across final sample of 3.54), fat tails increase objective option costs by just 0.4% on a synthetic option and 5–6% on firm data, suppressed by the short exercisable lifetimes characteristic of Swedish programs. Finally, firm-reported IFRS 2 values sit between traditional Black–Scholes valuations and our model’s subjective value, suggesting that current reporting practice produces neither a frictionless benchmark price nor the employee’s certainty equivalent.