How do Executives Exercise Their Stock Options?

40 Pages Posted: 14 Feb 2009 Last revised: 14 Dec 2011

See all articles by Daniel Klein

Daniel Klein

University of Mannheim - Department of Business Administration and Finance

Ernst G. Maug

University of Mannheim Business School; European Corporate Governance Institute (ECGI)

Date Written: December 14, 2011

Abstract

Abstract We analyze how 14,000 US top executives exercise their stock options. We investigate competing explanatory approaches to identify the main variables that influence executives' timing decisions. We find that the predictions specific to utility theory are not supported by the data. Managers seem to see through investor sentiment and select rationally from their exercisable options. Exercise decisions depend on past stock prices in a way that is consistent with reference dependence, whereas we find inconsistent evidence for trend extrapolation. Characteristics of managers' option portfolios and institutional factors (vesting dates, blackout periods) have a first-order impact on exercise behavior, whereas timing based on inside information is quantitatively less important. Our overall conclusion is that managers' behavior is rational with only small or infrequent errors, but their preferences are not well described by conventional utility theory.

Keywords: Stock options, early exercise decisions, executive compensation

JEL Classification: G30, M52

Suggested Citation

Klein, Daniel and Maug, Ernst G., How do Executives Exercise Their Stock Options? (December 14, 2011). ECGI - Finance Working Paper No. 284/2010. Available at SSRN: https://ssrn.com/abstract=1342316

Daniel Klein

University of Mannheim - Department of Business Administration and Finance ( email )

D-68131 Mannheim
Germany

Ernst G. Maug (Contact Author)

University of Mannheim Business School ( email )

L9, 1-2
Mannheim, 68131
Germany
+49 621 181-1952 (Phone)

HOME PAGE: http://cf.bwl.uni-mannheim.de/de/people/maug/

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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