We use unique case study data to analyze the behavior of top managers in a distinct executive stock option plan. We gather extensive questionnaire data on the managers' traits (e.g. on their risk aversion, diversification, and volatility forecasts) and combine it with individual-level exercise data. Our results show that the managers in our sample expect very low volatilities (compared with historical estimates), are well diversified and modestly risk averse. This implies that the value-cost wedge of options can be smaller than usually assumed. Options are exercised very early and in large transactions. We provide results that suggest that exercise decisions vary with expected volatility, managerial wealth, and mental accounting. In particular, we find that managers who expect lower volatility exercise earlier. We show that this result is consistent with the predictions of expected utility models using our managers' survey parameters.
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Available at SSRN: http://ssrn.com/abstract
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