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

36 Pages Posted: 12 Jun 2004

See all articles by Juha-Pekka Kallunki

Juha-Pekka Kallunki

University of Oulu - Department of Accounting and Finance

Jussi Nikkinen

University of Vaasa - Department of Accounting and Finance

Petri Sahlström

University of Oulu

Kristina Wichmann

Alexander Corporate Finance

Date Written: May 11, 2003

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

Suggested Citation

Kallunki, Juha-Pekka and Nikkinen, Jussi and Sahlström, Petri and Wichmann, Kristina, Managers' Motives for Selling Executive Stock Options on Secondary Markets: A Study of the Unique Environment of Finland (May 11, 2003). EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=499242 or http://dx.doi.org/10.2139/ssrn.499242

Juha-Pekka Kallunki (Contact Author)

University of Oulu - Department of Accounting and Finance ( email )

PO Box 4600
FIN-90014
Finland
+358 8 553 2956 (Phone)
+358 8 553 2906 (Fax)

HOME PAGE: http://www.cc.oulu.fi/~jpkallun

Jussi Nikkinen

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland
+358 6 3248541 (Phone)

Petri Sahlström

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014
Finland

Kristina Wichmann

Alexander Corporate Finance ( email )

Aleksanterinkatu 19 A
Helsinki, FIN-00100
Finland
+358 9 6226 0070 (Phone)
+358 9 6226 0030 (Fax)

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