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Early Exercise Behaviour in Performance-vested Stock Option Grants

Author

Listed:
  • Susana Alvarez-Diez

    (Department of Quantitative Methods for the Economy, University of Murcia Murcia)

  • J. Samuel Baixauli-Soler

    (Department of Management and Finance, University of Murcia)

  • Maria Belda-Ruiz

    (Department of Business Administration, Catholic University of Murcia)

Abstract

Stock options in executive compensation packages influence risk taking behaviour through the sensitivities of executive wealth to stock price (delta) and stock return volatility (vega). In the context of performance-vested stock options (PVSOs), this paper carries out a sensitivity analysis of the PVSO value and incentives to examine the effect of considering the executive's early exercise behaviour that arises from risk aversion in the valuation framework. The results show the importance of taking into account voluntary early exercise in order to avoid the overvaluation of PVSO value and risk incentives, particularly when the PVSO is in-the-money. It will allow us to obtain correct conclusions about delta and vega and their effects on executive risk-taking behaviour.

Suggested Citation

  • Susana Alvarez-Diez & J. Samuel Baixauli-Soler & Maria Belda-Ruiz, 2016. "Early Exercise Behaviour in Performance-vested Stock Option Grants," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 55-78, May.
    • Handle: RePEc:cuf:journl:y:2016:v:17:i:1:alvarez-diez
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    References listed on IDEAS

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    More about this item

    Keywords

    Performance-vested stock options; Voluntary early exercise; Incentives; Delta; Vega;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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