The Influence of Risk Diversification on the Early Exercise of Employee Stock Options by Executive Officers

Posted: 25 Feb 2002

See all articles by Thomas Hemmer

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business

Terry J. Shevlin

University of California-Irvine

Steven R. Matsunaga

University of Oregon

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Abstract

This paper examines the decision to exercise employee stock options (ESOs). Our results indicate a positive relation between the extent of "early" exercise and the unhedged risk of the option. Specifically we document a positive relation between the variance of ESO returns and the extent of "early" exercise and show that the strength of the relation is reduced by the extent the firm hedges the returns on the ESO. We thus provide empirical evidence of a link between an ESO's expected term and its investment risk to the executive and document that some firms provide a hedge against option risk.

JEL Classification: J33

Suggested Citation

Hemmer, Thomas and Shevlin, Terry J. and Matsunaga, Steven R., The Influence of Risk Diversification on the Early Exercise of Employee Stock Options by Executive Officers. Available at SSRN: https://ssrn.com/abstract=294900

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Steven R. Matsunaga (Contact Author)

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
503-346-3340 (Phone)
503-346-3341 (Fax)

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