Should There Exist Secondary Markets for Executive Stock Options?

19 Pages Posted: 12 Jun 2006

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

Abstract

This paper investigates the potential disadvantages of the secondary markets for executive stock options (ESOs). The benefits of such markets are evident, but they might also have negative effects for shareholders. Executives might, for example, use inside information to time their ESO selling. We investigate two personal motives of managers that can be assumed to affect their optimal selling decision, that is, managers' personal portfolio management issues and the use of inside information. We explore these motives by analyzing unique data from Finland, where there are secondary markets for ESOs. The results of the study support the traditional portfolio diversification hypothesis according to which managers tend to sell their ESOs when holding an ESO is equivalent to holding the underlying stock; that is, in such a case a manager's wealth is closely tied to the stock price of the firm. With respect to the use of inside information the results indicate that ESO selling activity is not related to future stock price behaviour, suggesting that managers do not use inside information to determine the selling time of their ESOs. These results imply that the existence of secondary markets for ESOs does not weaken the usefulness of ESOs as the management compensation, although the benefits of such markets are evident.

Suggested Citation

Kallunki, Juha-Pekka and Nikkinen, Jussi and Sahlström, Petri and Wichmann, Kristina, Should There Exist Secondary Markets for Executive Stock Options?. Accounting and Finance, Vol. 46, No. 2, pp. 265-283, June 2006. Available at SSRN: https://ssrn.com/abstract=906895 or http://dx.doi.org/10.1111/j.1467-629X.2006.00167.x

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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