Does CEO's Holding of Vested Options Measure Overconfidence?

Posted: 18 Aug 2016 Last revised: 28 May 2020

See all articles by Ali Bayat

Ali Bayat

University of Aberdeen

Reza Salehnejad

University of Manchester - Alliance Manchester Business School

Peter Kawalek

Alliance Manchester Business School

Date Written: August 17, 2016

Abstract

Option-based measures of overconfidence are widely used as proxies for overconfidence in corporate finance. Overexposure of a CEO's wealth to the firm's idiosyncratic risk is taken as a sign of CEO overconfidence. The literature has used the measures to study the effect of managerial overconfidence on corporate investment, financial policy, innovation and merger and acquisition. The belief is that overconfident CEOs behave differently. We trace CEOs across firms to investigate whether option exercise decisions correlate with firm characteristics. We find that a CEO's decision to hold or exercise vested options is considerably driven by firm and market conditions. Our analysis casts doubt on the view that repeated holding of in-the-money options solely captures overconfidence.

Keywords: Managerial Biases, CEO Overconfidence, CEO Option-exercise Decision

JEL Classification: G3, G02

Suggested Citation

Bayat, Ali and Salehnejad, Reza and Kawalek, Peter, Does CEO's Holding of Vested Options Measure Overconfidence? (August 17, 2016). Available at SSRN: https://ssrn.com/abstract=2825027 or http://dx.doi.org/10.2139/ssrn.2825027

Ali Bayat (Contact Author)

University of Aberdeen ( email )

King's College
Aberdeen, AB24 3FX
United Kingdom

HOME PAGE: http://https://www.abdn.ac.uk/business/people/profiles/ali.bayat

Reza Salehnejad

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Peter Kawalek

Alliance Manchester Business School ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

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