Impact of Asset Bubbles on Exercise of Executive Stock Options

This study examines whether Chief Executive Officers (CEOs) exercise a greater proportion of their exercisable options in response to firm-specific stock price bubbles. For a sample of U.S. firms from 1992 to 2021, the study identifies stock price bubble periods using the Generalized Sup Augmented Dickey-Fuller (GSADF) method. A bubble is a statistical measure that detects an ex-post firm-specific stock price exuberance that creates abnormally high variation in stock prices arising from changes in discount rates, R&D and market liquidity. If executives have private information and can infer firm-specific bubbles, they are likely to exercise a greater proportion of their exercisable stock options during bubbles to benefit from their firms’ stock price exuberance. Using data aggregated at the CEO-year level, we find that executives are prone to exercising a larger portion of their vested stock options during market bubbles, with the aim of monetizing on the exuberance in the firm’s stock price. They leverage their expertise and their acquired price-sensitive private information to identify these bubbles. We also find that CEOs’ option exercise activity increases as the duration of the bubble increases to capture the price momentum.