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
Type
Article accepté pour publication ou publiéDate
2016Journal name
Economic ModellingVolume
Volume 52, Part ANumber
JanuaryPublisher
Elsevier
Pages
144–154
Publication identifier
Metadata
Show full item recordAbstract (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 / Keywords
Stock options; Exercise behavior; Probability weighting; Employee sentimentRelated items
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