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Psychological factors and stock option exercise

Chip Heath, Steven Huddart, and Mark Lang

We investigate "stock option" exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors influence Exercise. Consistent with psychological models of beliefs, employees exercise in response to stock price trends---exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons. Consistent with psychological models of values that include reference points, employee exercise activity doubles when the stock price exceeds the maximum price attained during the previous year.

JEL Classification: D81 J33 M12

Keywords: risk aversion, compensation, prospect theory, valuation, decision heuristics, reference points

Quarterly Journal of Economics Volume 114, Number 2 (May 1999) 601-627

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 863-0048
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