What Determines How Top Managers Value Their Stock Options?

34 Pages Posted: 4 Jul 2008 Last revised: 12 Sep 2010

See all articles by Zacharias Sautner

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Martin Weber

University of Mannheim - Department of Banking and Finance

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: September 9, 2010

Abstract

What determines how top managers value their executive stock options? We explore this question empirically by using a unique survey data set which combines subjective option valuation data with a wide set of individual-level variables. In contrast to theoretical predictions, individuals in our data set substantially overvalue the options they receive. Furthermore, we find a strong heterogeneity in the values managers of the same firm place on their options. Optimism and overconfidence (miscalibration) measures are significantly related to option values, while measures of risk aversion are not. When managers are optimistic about company stock they attribute higher values to their options. This finding is consistent with the implicit assumption in Malmendier and Tate (2005, 2008) and Malmendier et al. (2010). These papers assume that managers who overestimate future stock prices value their options higher and exercise at later points in time. We also find that less overconfident (miscalibrated) managers put higher values on their options.

Keywords: Executive Stock Options, Subjective Option Values, Optimism, Overconfidence, Miscalibration

JEL Classification: M4, M5, G3

Suggested Citation

Sautner, Zacharias and Weber, Martin and Glaser, Markus, What Determines How Top Managers Value Their Stock Options? (September 9, 2010). Available at SSRN: https://ssrn.com/abstract=1155084 or http://dx.doi.org/10.2139/ssrn.1155084

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstraße 4
Munich, 80539
Germany

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