Employee stock option valuation: Modeling the voluntary early exercise boundary Neil Brisley and Chris K. Anderson * March 2007 Abstract. The Hull and White (2004) barrier option lattice model is widely used to value employee stock options. It assumes that employees exercise voluntarily whenever the stock price reaches a fixed multiple of the strike price. However, empirical evidence and financial theory suggest that employees make a trade-off between option value captured and time value forgone. We propose a new barrier option lattice model that explicitly recognizes and accounts for this reality. We show why our model is significantly less prone to bias than the Hull and White model and the modified Black-Scholes model when parameter inputs are calculated from historical observations of voluntary exercise behaviors. . * Brisley is assistant professor of finance at the Richard Ivey School of Business, University of Western Ontario, 1151 Richmond Street North, London, Ontario N6A 3K7, Canada; Tel: +1-519-661-3012; email: nbrisley@ivey.uwo.ca; www.ivey.uwo.ca/faculty/Neil_Brisley.html . Anderson is assistant professor of operations management at the School of Hotel Administration, Cornell University, Ithaca, NY 14850, U.S.A. email: canderson@cornell.edu. Brisley acknowledges support from Social Sciences and Humanities Research Council of Canada standard research grant #410-2007-1564