IDEAS home Printed from
   My bibliography  Save this paper

The Impact of Risk on the Decision to Exercise an ESO


  • Kyriacos Kyriacou


This paper examines the impact of firms’ risk on executives’ decisions to exercise their executive stock options (ESOs). As the proportion of executives’ remuneration linked to the value of their firm (and therefore shareholder wealth) has increased, so the extent to which these executives hold undiversified personal portfolios has also increased. This lack of personal diversification gives executives a strong incentive to exercise early. It has been shown that this incentive can be sufficiently strong to outweigh the beliefs an executive may have regarding the firm’s valuation. I hypothesise that as the risk of a firm increases, so an ESO exercise is less likely to be induced by an executive’s private information. Consistent with the need to diversify, I find that it is only exercises in low risk firms that precede significantly negative abnormal returns.

Suggested Citation

  • Kyriacos Kyriacou, 2003. "The Impact of Risk on the Decision to Exercise an ESO," Public Policy Discussion Papers 03-18, Economics and Finance Section, School of Social Sciences, Brunel University.
  • Handle: RePEc:bru:bruppp:03-18

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 61-82, Suppl. De.
    2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, July.
    3. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    4. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 211-228.
    5. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1997. "Cointegration and Changes in Regime: The Japanese Consumption Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 151-168, March-Apr.
    6. Hansen, Bruce E, 1996. "Erratum: The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 195-198, March-Apr.
    7. Psaradakis, Zacharias & Sola, Martin, 1998. "Finite-sample properties of the maximum likelihood estimator in autoregressive models with Markov switching," Journal of Econometrics, Elsevier, vol. 86(2), pages 369-386, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bru:bruppp:03-18. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John.Hunter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.