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Stock Options and Employee Behavior

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  • Sautner, Zacharias

    ()
    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

  • Weber, Martin

    ()
    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

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    Abstract

    Employee stock options (ESOs) are a widespread and economically highly significant phenomenon, both at the company and at the employee level. Stock options are not only relevant for CEOs, but also and increasingly for managers at lower grades in a corporation. Despite its economic importance, there exists very little empirical research that examines the behavior of employees in stock option programs. Our study attempts to fill this gap by empirically studying the behavior of option holders in a distinct ESO plan. We try to answer the following questions: How do employees exercise their stock options? How do employees dispose of company stock acquired in stock option programs? What rational and behavioral factors explain differences in observed exercise behavior? We study these questions by combining two data sets. The first data set consists of detailed individual-level ESO exercise transactions of senior managers from a large German corporation (transaction data). The second data set is based on an extensive questionnaire in which we asked these employees to answer a wide range of questions on employee-specific characteristics, beliefs and attitudes (questionnaire data). We find that employees exercise their options very early and in a few large transactions. A large majority of option recipients sell the shares acquired on exercise. Furthermore, our results suggest that, inconsistent with traditional ESO theories, exercise behavior is not driven by factors like risk aversion or individuals' holdings of company stock that are included in rational models of exercise. Our findings suggest that individuals' exercise decisions depend on the psychological factors miscalibration and mental accounting.

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    Bibliographic Info

    Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 05-26.

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    Length: 49 pages
    Date of creation: 11 May 2005
    Date of revision:
    Handle: RePEc:xrs:sfbmaa:05-26

    Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Jennifer Carpenter, 1997. "The Exercise and Valuation of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-10, New York University, Leonard N. Stern School of Business-.
    2. Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors And Stock Option Exercise," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 601-627, May.
    3. Francois Degeorge & Dirk Jenter & Alberto Moel & Peter Tufano, 2000. "Selling Company Shares to Reluctant Employees: France Telecom's Experience," NBER Working Papers 7683, National Bureau of Economic Research, Inc.
    4. Oyer, Paul & Schaefer, Scott, 2005. "Why do some firms give stock options to all employees?: An empirical examination of alternative theories," Journal of Financial Economics, Elsevier, vol. 76(1), pages 99-133, April.
    5. Nittai K. Bergman & Dirk Jenter, 2005. "Employee Sentiment and Stock Option Compensation," NBER Working Papers 11409, National Bureau of Economic Research, Inc.
    6. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
    7. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    8. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    9. Eli Ofek & David Yermack, 2000. "Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, vol. 55(3), pages 1367-1384, 06.
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    Cited by:
    1. Hamza Bahaji, 2009. "Contribution à l'analyse des déterminants du comportement d'exercice des porteurs de stock options : une étude empirique sur le marché Américain," Working Papers halshs-00512840, HAL.

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