Employee Stock Options and Investment

55 Pages Posted: 6 Mar 2008 Last revised: 23 Apr 2015

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Michael L. Lemmon

University of Utah - Department of Finance

Yuri Tserlukevich

Arizona State University (ASU)

Date Written: December 2008

Abstract

Exercises of employee stock options generate substantial cash inflows to the firm. These cash inflows substitute for costly external finance in those states of the world in which the demand for investment is high. Using the fact that the proceeds from option exercises exhibit a distinct nonlinearity around the point where options fall out of the money, we estimate that firms increase investment by $0.34 for each dollar received from the exercise of stock options. Firms that face higher external financing costs allocate more of the proceeds from option exercises to investment.

Keywords: financial constraints, stock options, investment

Suggested Citation

Babenko, Ilona and Lemmon, Michael L. and Tserlukevich, Yuri, Employee Stock Options and Investment (December 2008). UBC Winter Finance 2008 ; AFA 2009; EFA 2008; Journal of Finance, Vol. 66, 2011. Available at SSRN: https://ssrn.com/abstract=1101292 or http://dx.doi.org/10.2139/ssrn.1101292

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Yuri Tserlukevich (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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