IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Subjective stock option values and exercise decisions : determinants and consistency

Listed author(s):
  • Sautner, Zacharias
  • Weber, Martin

Stock option programs constitute an important economic domain both for the issuing companies and for their employees. Little is known, however, about which individual variables actually drive exercise patterns and how employees value their stock options. We study the following set of research questions to provide a contribution to a better understanding of these topics: How do employees exercise and value stock options? What are the determinants of exercise decisions and subjective option values? Do employees exercise options from different grants in a consistent way? Are subjective option values consistent with individuals' exercise decisions? We are able to use a unique data set combining employee-level option exercises with subjective option values extracted by means of an internal survey. Furthermore, we can combine this data with a wide set of individual variables. We find that employees exercise their stock options well before expiration. The median individual sacrifices more than 90% of the option's lifetime by exercising early. Surprisingly, we also find that individuals substantially overvalue the options they received. We show that exercise dates and option values are unrelated with measures of risk aversion. Loss aversion, however, does a better job in explaining the heterogeneity in option values. We also document that optimism and overconfidence measures are significantly related to option values. We show that managers that are very optimistic about company stock place higher values on their options. This finding is consistent with the sentiment hypothesis presented in Oyer and Schaefer (2004) and Bergman and Jenter (2004). Some evidence for an intertemporal consistency of exercises decisions is also provided. However, we find only weak support for the hypothesis that higher option values are associated with later exercise decisions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://ub-madoc.bib.uni-mannheim.de/2640/1/dp05_31.pdf
Download Restriction: no

Paper provided by Sonderforschungsbreich 504 in its series Papers with number 05-31.

as
in new window

Length:
Date of creation: 2005
Handle: RePEc:mnh:spaper:2640
Contact details of provider: Postal:
D-68131 Mannheim

Phone: (49) (0) 621-292-2547
Fax: (49) (0) 621-292-5594
Web page: http://ub-madoc.bib.uni-mannheim.de/view/ubmaseries/90080.html
Email:


More information through EDIRC

References listed on IDEAS
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.:

as
in new window


  1. John E. Core & Wayne R. Guay & David F. Larcker, 2003. "Executive equity compensation and incentives: a survey," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 27-50.
  2. Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors and Stock Option Exercise," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 601-627.
  3. Degeorge, Francois & Jenter, Dirk & Moel, Alberto & Tufano, Peter, 2004. "Selling company shares to reluctant employees: France Telecom's experience," Journal of Financial Economics, Elsevier, vol. 71(1), pages 169-202, January.
  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. Hemmer, Thomas & Matsunaga, Steve & Shevlin, Terry, 1996. "The influence of risk diversification on the early exercise of employee stock options by executive officers," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 45-68, February.
  6. Allen M. Poteshman & Vitaly Serbin, 2003. "Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options," Journal of Finance, American Finance Association, vol. 58(1), pages 37-70, 02.
  7. Ito, Takatoshi, 1990. "Foreign Exchange Rate Expectations: Micro Survey Data," American Economic Review, American Economic Association, vol. 80(3), pages 434-449, June.
  8. Sautner, Zacharias & Weber, Martin, 2005. "Stock Options and Employee Behavior," Sonderforschungsbereich 504 Publications 05-26, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  9. Kevin J. Murphy & Brian J. Hall, 2000. "Optimal Exercise Prices for Executive Stock Options," American Economic Review, American Economic Association, vol. 90(2), pages 209-214, May.
  10. Bergman, Nittai K. & Jenter, Dirk, 2007. "Employee sentiment and stock option compensation," Journal of Financial Economics, Elsevier, vol. 84(3), pages 667-712, June.
  11. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, vol. 56(5), pages 1747-1764, October.
  12. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  13. Gur Huberman & Paul Sengmueller, 2004. "Performance and Employer Stock in 401(k) Plans," Review of Finance, Springer, vol. 8(3), pages 403-443.
  14. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
  15. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  16. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
  17. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
  18. May, Don O, 1995. " Do Managerial Motives Influence Firm Risk Reduction Strategies?," Journal of Finance, American Finance Association, vol. 50(4), pages 1291-1308, September.
  19. Huddart, Steven & Lang, Mark, 1996. "Employee stock option exercises an empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 5-43, February.
  20. Vicky Henderson, 2002. "Stock Based Compensation: Firm-specific risk, Efficiency and Incentives," OFRC Working Papers Series 2002fe01, Oxford Financial Research Centre.
  21. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mnh:spaper:2640. 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: (Katharina Rautenberg)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.