The Effects Of Endowment And Loss Aversion In Managerial Stock Option Valuation Academic Article uri icon

abstract

  • Assuming a positive influence of stock price volatility on stock option value, incentive alignment proponents argue that stock option compensation encourages managerial risk seeking and, thus, aligns managers' and shareholders' risk preferences. Our findings show that stock option holders overvalue unexercisable options relative to options being offered and to normative (e.g., Black-Scholes) valuations. Further, the influence of stock price volatility on holders' subjective valuations depends on stock price trend. In sum, results suggest that during stock option valuation, managers draw on heuristics that financial options theory and models fail to capture. We discuss implications for compensation design and research. Academy of Management Journal.

published proceedings

  • Academy of Management Journal

author list (cited authors)

  • Devers, C. E., Wiseman, R. M., & Holmes, R. M.

citation count

  • 92

complete list of authors

  • Devers, Cynthia E||Wiseman, Robert M||Holmes, R Michael

publication date

  • February 2007