Risk, Ambiguity, and the Exercise of Employee Stock Options

44 Pages Posted: 10 Mar 2014 Last revised: 28 Jan 2020

See all articles by Yehuda (Yud) Izhakian

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

David Yermack

New York University (NYU) - Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2016

Abstract

We investigate the importance of ambiguity, or Knightian uncertainty, in executives’ decisions about when to exercise stock options. We develop an empirical estimate of ambiguity and include it in regression models alongside the more traditional measure of risk, equity volatility. We show that each variable has a statistically significant effect on the timing of option exercises, with volatility causing executives to hold their options longer in order to preserve remaining option value, and ambiguity increasing the tendency for executives to exercise early in response to risk aversion.

Keywords: Ambiguity aversion, Employee stock options

JEL Classification: C65, D81, D83

Suggested Citation

Izhakian, Yehuda (Yud) and Yermack, David, Risk, Ambiguity, and the Exercise of Employee Stock Options (May 16, 2016). Journal of Financial Economics (JFE), Vol. 124, No. 1, 2017, Available at SSRN: https://ssrn.com/abstract=2406635 or http://dx.doi.org/10.2139/ssrn.2406635

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

David Yermack (Contact Author)

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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