Exercises of Executive Stock Options on the Vesting Date

Abstract

"We investigate the motives for executives to exercise executive stock options on the options' vesting date versus a later early exercise. We find that executives frequently exercise on the vesting date, executives with a greater need for portfolio diversification and riskier underlying stocks are more likely to exercise their options on the vesting date versus a later early exercise, and private information appears less relevant to vesting date exercises." Copyright (c) 2010 Financial Management Association International.

Revisiting the incentive effects of executive stock options

“…9 The equation that the expected optimal exercise time is the vesting date if the options are very in the money provides an implication: the executive is likely to exercise in-the-money options immediately after options are vested. Therefore, if the executive pays efforts so that the firm stock price increases and the options are very in the money, we could expect immediate exercises at the vesting date, consistent with the findings in Ofek and Yermack (2000) and Fu and Ligon (2010).…”

The response of deferred executive compensation to changes in tax rates

“…This paper, however, focuses exclusively on the question of how taxes affect the initial choice of compensation between cash (salary and bonus) and deferred income because timing decisions have been extensively studied by Feldstein (1995) for the 1986 tax reform and Goolsbee (2000a,b) for the 1993 tax changes. Moreover, the exercise of options is often a mechanical decision; for example, Huddart and Liang (2006) and Fu and Ligon (2010) find that managers exercise a substantial portion of their options as soon as they vest. 3 A challenge in estimating the response of deferred income to changes in taxes is that the tax rate that the executive faces is endogenous, depending on the executive's current year income.…”

Private Information and the Exercise of Executive Stock Options

“…Insiders that hold private negative information would still choose to exercise at this time and therefore some negative abnormal returns should be present; however, the private information effect could be dominated by portfolio‐rebalancing transactions that contain no private information. Indeed, Fu and Ligon (2009) find that executives with greater diversification needs and riskier underlying stocks are more likely to exercise on the vest date. Thus, our hypothesis is stated as follows:…”