Stocking Up: Executive Optimism and Share Retention
Hong Kong University of Science and Technology
University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)
February 15, 2009
AFA 2010 Atlanta Meetings Paper
24th Australasian Finance and Banking Conference 2011 Paper
We rigorously model the option exercise and portfolio choice problem of optimistic executives. Our analysis motivates a novel indicator of optimism, which is based on how an executive handles shares acquired on option exercise. Optimistic executives retain some of the stock received, while pessimistic executives sell all shares. The resulting indicator variable can be easily inferred using standard data sets. Theory suggests this indicator is superior to alternatives based on exercise behavior. In a large cross-section, our measure of CEO optimism explains investment intensity and leverage better than those used previously. We empirically confirm several theoretical implications of the model.
Number of Pages in PDF File: 50
Keywords: Optimism, Executive stock option, Behavioral corporate finance, Investment policy, Dynamic trading
JEL Classification: G11, G30, G31, G32working papers series
Date posted: February 18, 2009 ; Last revised: March 19, 2012
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