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

Hamza Bahaji and Jean-Francois Casta ()
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Hamza Bahaji: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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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: 2016-01
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Citations: View citations in EconPapers (1)

Published in Economic Modelling, 2016, Volume 52, Part A, ⟨10.1016/j.econmod.2014.12.041⟩

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Journal Article: Employee stock option-implied risk attitude under Rank-Dependent Expected Utility (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01277108

DOI: 10.1016/j.econmod.2014.12.041

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