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Department of Applied Finance and Actuarial Studies

Seminar by Dr. Rob Tumarkin

Research Seminars - business and economics
  • Topic: Stocking Up: Executive Optimism and Share Retention
  • Speaker: Dr. Rob Tumarkin - School of Banking and Finance, Australian School of Business, University of New South Wales
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We model the option exercise and portfolio choice problem of optimistic executives. Our approach extends existing theoretical research by endogenizing both the executive's investment in company stock and the timing of option exercise. We show that (i) option exercise is delayed by executive optimism and (ii) optimistic executives should not hold options beyond the optimal early-exercise boundary for unconstrained non-optimistic agents. The analysis suggests that measures of optimism based on option exercise timing will be sensitive to the stock-price process. Our analysis motivates a novel indicator of optimism based on how an executive handles shares acquired on option exercise. Optimistic executives retain some of the shares received, while pessimistic executives sell all shares. Using insider transaction data, we construct a measure of optimism. We set an indicator variable to 1 if a CEO sells less than 99% of the shares acquired from option exercise in one week.
Our optimism measure, Share Retainer, is the weighted average of observations of this indicator. In a large cross-section, Share Retainer explains investment intensity and leverage better than previously used optimism measures. We empirically confirm several theoretical implications of the model.

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Stocking Up: Executive Optimism and Share Retention


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