How do Executives Exercise Their Stock Options?

How do Executives Exercise Their Stock Options?

Daniel Klein, Ernst Maug

Series number :

Serial Number: 
284/2010

Date posted :

May 01 2010

Last revised :

October 01 2019
SSRN Share

Keywords

  • Stock Options • 
  • early exercise decisions • 
  • executive compensation

We analyze how 14,000 US top executives exercise their stock options. Factors suggested by existing theories have low or moderate explanatory power. Variables that model executives’ motive to diversify fare particularly poorly, whereas variables that capture reference-dependent preference, such as past highs and lows of stock prices, perform better.

By contrast, characteristics of option portfolios are of firstorder importance and suggest that managers have target ownership levels. Institutional features like vesting restrictions or blackout periods also have a first-order impact. We conclude that executives’ main motivations for exercising stock options early seem to be outside the scope of extant models.

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Authors

Real name:
Daniel Klein