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Do Stock Options Overcome Managerial Risk Aversion? Evidence from Exercises of Executive Stock Options

Author

Listed:
  • Randall A. Heron

    (Kelley School of Business, Indiana University, Indianapolis, Indiana 46202)

  • Erik Lie

    (Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52242)

Abstract

We report that the probability that executives exercise options early decreases with the volatility of the underlying stock return. We interpret this to mean that executives’ subjective option value increases with volatility and that option grants increase executives’ risk appetite. Further decomposition reveals that the results are most pronounced for idiosyncratic volatility, consistent with our conjecture that executives believe they can better predict or influence the resolution of idiosyncratic uncertainty than systematic uncertainty and, thus, favor the former.

Suggested Citation

  • Randall A. Heron & Erik Lie, 2017. "Do Stock Options Overcome Managerial Risk Aversion? Evidence from Exercises of Executive Stock Options," Management Science, INFORMS, vol. 63(9), pages 3057-3071, September.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:9:p:3057-3071
    DOI: 10.1287/mnsc.2016.2485
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    References listed on IDEAS

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