Exercise behavior, valuation, and the incentive effects of employee stock options

Bettis, J. Carr; Bizjak, John M.; Lemmon, Michael L.

doi:10.1016/j.jfineco.2004.05.006

Cited by 197 publications

(202 citation statements)

References 26 publications

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“…The latter results are consistent with Hemmer, Matsunaga, and Shevlin (1996), Bettis, Bizjak, and Lemmon (2005), and Klein and Maug (2011). When we decompose volatility, we find that, irrespective of whether the acquired shares are immediately sold, early exercises are more likely when the idiosyncratic volatility is high and the systematic volatility is low.…”

supporting

confidence: 88%

“…For example, Hemmer, Matsunaga, and Shevlin (1996), Bettis, Bizjak, and Lemmon (2005) run regressions of the time between the exercise and maturity.…”

Section: Methodsmentioning

confidence: 99%

“…The exceptions include the market returns between either six months and one month before exercise or twelve months to six months before exercise, which are lower for early exercises in some of the models. Huddart and Lang (1996), Heath, Huddart, and Lang (1999), Bettis, Bizjak, and Lemmon (2005), and Klein and Maug (2011) also report that early exercises are generally more likely to occur after recent stock price run-ups. 11…”

Section: Regressions Of the Time Between Exercise And Maturitymentioning

confidence: 99%

“…On this backdrop, Lambert, Larcker, and Verrechia (1991), Carpenter (2000), Hall and Murphy (2002), and Ross (2004) show that risk-averse executives place a lower value on their ESOs than do diversified investors and that the concavity of executives' utility functions could eclipse the convexity of the option payoffs, in which case ESOs would encourage less risk-taking behavior. Bettis, Bizjak, and Lemmon (2005) explore ESO values and incentives further, with a particular emphasis on the role of exercises. In their utility-based valuation model (which is an extension of Carpenter, 1998), executives exercise if the stock price reaches a "threshold price," such that the utility from locking in the gain exceeds the utility from holding the option.…”

Section: Introductionmentioning

confidence: 99%

“…In addition, Huddart and Lang (1996) document evidence, albeit statistically weak, that the top five percent level employees retain options when volatility is high. Conversely, Hemmer, Matsunaga, and Shevlin (1996), Bettis, Bizjak, and Lemmon (2005), and Klein and Maug (2011) find that executives are more likely to exercise their options early in the presence of high volatility. 1 However, unlike the former three studies, these latter three studies compare early exercises to late exercises, which makes their results susceptible to secular trends.…”

Section: Introductionmentioning

confidence: 99%

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Do Stock Options Overcome Managerial Risk Aversion? Evidence from Exercises of Executive Stock Options

Heron

Lie

2017

Management Science

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We report that the probability that executives exercise options early decreases with the volatility of the underlying stock return. We interpret this to mean that executives' subjective option value increases with volatility and that option grants increase executives' risk appetite. Further decomposition reveals that the results are most pronounced for idiosyncratic volatility, consistent with our conjecture that executives believe they can better predict or influence the resolution of idiosyncratic uncertainty than systematic uncertainty, and, thus, favor the former.We thank the Editor (Wei Jiang), the Associate Editor, two anonymous referees, and seminar participants at BI Norwegian Business School, Cal State Fullerton, City University of Hong Kong, Florida State University, Northeastern University, the University of Nebraska, and the University of Oregon for helpful comments. Electronic copy available at: http://ssrn.com/abstract=2810289 Do stock options overcome managerial risk aversion? Evidence from exercises of executive stock options (ESOs) AbstractWe report that the probability that executives exercise options early decreases with the volatility of the underlying stock return. We interpret this to mean that executives' subjective option value increases with volatility and that option grants increase executives' risk appetite. Further decomposition reveals that the results are most pronounced for idiosyncratic volatility, consistent with our conjecture that executives believe they can better predict or influence the resolution of idiosyncratic uncertainty than systematic uncertainty, and, thus, favor the former.

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supporting

confidence: 88%

“…For example, Hemmer, Matsunaga, and Shevlin (1996), Bettis, Bizjak, and Lemmon (2005) run regressions of the time between the exercise and maturity.…”

Section: Methodsmentioning

confidence: 99%

Section: Regressions Of the Time Between Exercise And Maturitymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Do Stock Options Overcome Managerial Risk Aversion? Evidence from Exercises of Executive Stock Options

Heron

Lie

2017

Management Science

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Employee Stock Options

Henderson

Sun

2010

Encyclopedia of Quantitative Finance

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Enhancing managerial equity incentives with moving average payoffs

Tian

2020

Journal of Futures Markets

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Prior research suggests that Asian stock options provide stronger managerial equity incentives than traditional stock options do, holding the cost of the option grant constant. Although this is true on the grant date, it is not over the life of the option grant. Very little of the initial advantage remains after 2 years because Asian stock options have diminishing incentive effects over time. A simple solution is to replace averaging over the option's life with averaging over a moving window. We show that moving average options do not have the diminishing incentive problem and are effective in preventing managerial gaming.

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Exercise behavior, valuation, and the incentive effects of employee stock options

Cited by 197 publications

References 26 publications

Do Stock Options Overcome Managerial Risk Aversion? Evidence from Exercises of Executive Stock Options

Do Stock Options Overcome Managerial Risk Aversion? Evidence from Exercises of Executive Stock Options

Employee Stock Options

Enhancing managerial equity incentives with moving average payoffs

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