Employee stock option-implied risk attitude under Rank-Dependent Expected Utility
Bahaji, Hamza; Casta, Jean-François (2016), Employee stock option-implied risk attitude under Rank-Dependent Expected Utility, Economic Modelling, Volume 52, Part A, January, p. 144–154. 10.1016/j.econmod.2014.12.041
TypeArticle accepté pour publication ou publié
Journal nameEconomic Modelling
VolumeVolume 52, Part A
MetadataShow full item record
Abstract (EN)Probability weighting is one of the cornerstones of decision-making theories accommodating gambling preferences. This paper examines its relevance to explaining employee stock option exercise behavior. We characterized the optimal exercise policy for a representative employee with Rank-Dependent Expected Utility (RDEU) preferences. We find that the RDEU framework leads to improved predictions of empirical exercise patterns. The implications from our findings are twofold: (1) probability weighting implies an increase in stock option cost to shareholders; (2) employee exercise behavior-implied sentiment is affected by the firm's stock market risk and performance.
Subjects / KeywordsStock options; Exercise behavior; Probability weighting; Employee sentiment
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