Underwater Stock Options and Voluntary Executive Turnover: A Multi-Disciplinary Perspective Integrating Behavioral and Economic Theories

45 Pages Posted: 12 Jul 2007

See all articles by Benjamin B. Dunford

Benjamin B. Dunford

Purdue University - Department of Management

Derek Oler

Texas Tech University - Rawls College of Business

John Boudreau

University of Southern California - Marshall School of Business

Date Written: June 28, 2007

Abstract

In a longitudinal study of top US executives between 1996 and 2006, we examined the impact of underwater stock options on voluntary turnover. We took a multi-disciplinary perspective, which recognizes the financial and economic logic suggesting that while underwater options may carry a positive valuation based on Black-Scholes pricing, there are also a variety of psychological and behavioral theories suggesting that underwater option portfolios may motivate voluntary turnover to a greater extent than what can be captured by Black-Scholes pricing. We investigated whether BS valuation can be usefully augmented, as a predictor of voluntary turnover, by adding insights from psychology and other behavioral theories. Supporting a multi-disciplinary view, we found that the degree to which executive stock option portfolios were underwater was positively related to voluntary turnover, after controlling for the time value of the options and other factors.

Keywords: Executive Stock Options, Black-Scholes, Executive Turnover

JEL Classification: J33, J63, M52

Suggested Citation

Dunford, Benjamin B. and Oler, Derek and Boudreau, John, Underwater Stock Options and Voluntary Executive Turnover: A Multi-Disciplinary Perspective Integrating Behavioral and Economic Theories (June 28, 2007). Available at SSRN: https://ssrn.com/abstract=999703 or http://dx.doi.org/10.2139/ssrn.999703

Benjamin B. Dunford (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States

Derek Oler

Texas Tech University - Rawls College of Business ( email )

P.O. Box 42101
Lubbock, TX 79409
United States
806-834-2354 (Phone)
806-742-3182 (Fax)

John Boudreau

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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