Uncertainty Avoidance and the Timing of Employee Stock Option Exercise

Abstract

We examine the impact of the cultural norm of uncertainty avoidance on employee stock option (ESO) exercise behaviour using proprietary data from a multinational firm. We find that employees from countries with higher levels of uncertainty avoidance exercise their stock options earlier. These findings lend support to a maintained assumption in the ESO literature that employee attitudes towards uncertainty influence stock option exercise behaviours. Our findings further help to explain prior findings of cross-cultural differences in firms' compensation practices by indicating that employee responses to option-based pay and firms' consequent financial reporting costs vary as functions of employee uncertainty avoidance.

Keywords: employee stock options, option exercise, compensation, multinationals, subjective valuation, FAS 123R

JEL Classification: M40, M41, M52, J33