Risk, Ambiguity, and the Exercise of Employee Stock Options

33 Pages Posted: 19 Mar 2014 Last revised: 1 Aug 2021

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: March 2014

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. Regression estimates for the volatility and ambiguity variables imply similar magnitudes of economic impact upon the exercise decision, with the volatility variable being about 2.5 times stronger.

Suggested Citation

Izhakian, Yehuda (Yud) and Yermack, David, Risk, Ambiguity, and the Exercise of Employee Stock Options (March 2014). Available at SSRN: https://ssrn.com/abstract=2411278

Yehuda (Yud) Izhakian (Contact Author)

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

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

David Yermack

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

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

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