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Please use this identifier to cite or link to this item: http://bura.brunel.ac.uk/handle/2438/919

Title: The Impact of Risk on the Decision to Exercise an ESO
Authors: Kyriacou, K
Keywords: Diversification, Executive Stock Options, Risk.
Publication Date: 2003
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 03-18
Abstract: This paper examines the impact of firms’ risk on executives’ decisions to exercise their executive stock options (ESOs). As the proportion of executives’ remuneration linked to the value of their firm (and therefore shareholder wealth) has increased, so the extent to which these executives hold undiversified personal portfolios has also increased. This lack of personal diversification gives executives a strong incentive to exercise early. It has been shown that this incentive can be sufficiently strong to outweigh the beliefs an executive may have regarding the firm’s valuation. I hypothesise that as the risk of a firm increases, so an ESO exercise is less likely to be induced by an executive’s private information. Consistent with the need to diversify, I find that it is only exercises in low risk firms that precede significantly negative abnormal returns.
URI: http://bura.brunel.ac.uk/handle/2438/919
Appears in Collections:School of Social Sciences Research Papers

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