Do Investors Value Information About in the Money/Out of the Money Stock Options Differently?

Abstract

The present study examines the information conveyed to investors through the holding of stock options by executives. In other words, we try to answer the following question: When corporate executives hold stock options that are, on average, either in the money or out of the money, do these holdings convey information to the market? We also examine the differences between the firms' characteristics in both types of situations. When a firm's executive stock options (ESOs) are on average in the money, the results indicate that the market attaches a positive value to the spread size and the number of options outstanding. Furthermore, the importance investor's grant to executives' holding out of the money stock options is far less pronounced. In fact, when a firm's ESOs are on average out of the money, the results tend to show that investors attach value only to the number of options in circulation. Thus, overall, out of the money ESOs do not seem to convey the same information to financial markets as in the money ESOs. Moreover, firms with in the money ESOs are much larger in scale, profitable, and spend less on research and development than firms with out of the money ESOs.