What determines how top managers value their stock options?

Abstract

What determines how top managers value their executive stock options? We explore this question empirically by using a unique survey data set which combines subjective option valuation data with a wide set of individual-level variables. In contrast to theoretical predictions, individuals in our data set substantially overvalue the options they receive. Furthermore, we find a strong heterogeneity in the values managers of the same firm place on their options. Optimism and overconfidence (miscalibration) measures are significantly related to option values, while measures of risk aversion are not. When managers are optimistic about company stock they attribute higher values to their options. This finding is consistent with the implicit assumption in Malmendier and Tate (2005, 2008) and Malmendier et al. (2010). These papers assume that managers who overestimate future stock prices value their options higher and exercise at later points in time. We also find that less overconfident (miscalibrated) managers put higher values on their options.