Managers' Motives for Selling Executive Stock Options on Secondary Markets: A Study of the Unique Environment of Finland

Abstract

This study examines the managers' motives for cashing their ESOs when they are able to sell them. Investigating the managers' selling behavior instead of their exercising behavior is advantageous, since when selling their ESOs, managers do not sacrifice the time value component of the ESO as in the case of ESO exercising. Consequently, managers' motives for selling ESOs depend only on their personal objectives and not on the cost of early exercise, which is the case in exercising. Two personal motives of managers possibly affecting the optimal selling decision are investigated: the ESO holder's personal portfolio management issues and the use of inside information. These motives are investigated using data from Finland, where there are secondary markets for ESOs allowing managers to sell their ESOs instead of exercising them. The results of the study support the hypothesis according to which managers tend to sell their ESOs when holding an ESO is equivalent to holding the underlying stock, i.e., in such a case a manager's wealth is closely tied to the stock price of the firm. By contrast, the traditional portfolio diversification hypothesis from the ESO volatility point of view is not supported as a selling motive. With respect to the use of inside information the results indicate that ESO selling activity is not related to future stock price behavior, suggesting that managers do not use inside information to determine the selling time of their ESOs.

Keywords: Management compensation, executive stock options