Employee stock option-implied risk attitude under Rank-Dependent Expected Utility

Hamza Bahaji and Jean-Francois Casta ()

Economic Modelling, 2016, vol. 52, issue PA, 144-154

Abstract: Probability weighting is one of the cornerstones of decision-making theories accommodating gambling preferences. This paper examines its relevance to explaining employee stock option exercise behavior. We characterized the optimal exercise policy for a representative employee with Rank-Dependent Expected Utility (RDEU) preferences. We find that the RDEU framework leads to improved predictions of empirical exercise patterns. The implications from our findings are twofold: (1) probability weighting implies an increase in stock option cost to shareholders; (2) employee exercise behavior-implied sentiment is affected by the firm's stock market risk and performance.

Keywords: Stock options; Exercise behavior; Probability weighting; Employee sentiment (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Working Paper: Employee stock option-implied risk attitude under Rank-Dependent Expected Utility (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:52:y:2016:i:pa:p:144-154

DOI: 10.1016/j.econmod.2014.12.041

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