AN EMPIRICAL-ANALYSIS OF COMMON-STOCK CALL EXERCISE - A NOTE

This study tests the hypothesis that common stock call options are exe rcised rationally and in accordance with the commonly used frictionles s markets boundary conditions. Using two years of historical early exe rcise data for common stock call options, the results show that contra ry to the frictionless markets boundary conditions, approximately 20 p ercent of the early call exercise occurs at times other than ex-divide nd dates. While most of the non-dividend related early exercise may be explained by transactions costs, a significant number of contracts ap pear to be exercised irrationally. These results suggest that failure to incorporate market frictions in option pricing models is likely to lead to specification error.