Psychological Factors and Stock Option Exercise

Abstract

We investigate stock option exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors in uence exercise. Consistent with psychological models of beliefs, employees exercise in response to stock price trends-exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons. Consistent with psychological models of values that include reference points, employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year.

Are executive stock option exercises driven by private information?

“…Given that we are examining the investment decisions of individual (albeit sophisticated) investors, they may make mistakes similar to those made by tax professionals (for example, Scholes et al 2005). Another possibility is that investors are influenced by psychological factors (Heath et al 1999;Thaler and Benartzi 2004;Odean, 2000 and2001). Finally, although we found little evidence to support such a possibility, it could be that some firms impose shareholding requirements on their executives so that the executives cannot sell the shares acquired though option exercises.…”

“…Nevertheless, this tax strategy has often been promoted by textbooks and practitioners, suggesting that insiders may still perceive an advantage even if it is not the case. 1 Third, as offered by Heath et al (1999) in explaining their findings, the suboptimality of option exercise decisions may be an artifact of psychological factors. This interpretation is very much in keeping with a growing literature in economics and finance demonstrating suboptimal individual investment behaviors (for example , Benartzi 2001;Thaler and Benartzi 2004;Odean 2000, 2001).…”

A tractable method to measure utility and loss aversion under prospect theory

“…Empirical evidence supports both the fourfold pattern and strong risk aversion for mixed prospects (e.g. Laughhunn et al 1980;Payne et al 1980Payne et al , 1981Schoemaker 1990;Myagkov and Plott 1997;Heath et al 1999).…”

Market-wide impact of the disposition effect: evidence from IPO trading volume

“…Historical maximum and minimum stock prices are also potential reference points: according to experimental evidence by Gneezy (2000) the maximum stock price is even more significant than the purchase price. Attaining new highs in stock prices is a significant determinant for exercise behavior in employee stock options (Heath et al, 1999) as well as in standardized exchange traded stock options (Poteshman and Serbin, 2003). Moreover, Grinblatt and Keloharju (2001) observe that new highs and lows compared to the past month affect the propensity to sell, but the effect varies with investor type.…”