Risk, Ambiguity, and the Exercise of Employee Stock Options
44 Pages Posted: 10 Mar 2014 Last revised: 28 Jan 2020
Date Written: May 16, 2016
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: Suggested Citation