Abstract
In this study, we document a large positive gap between the reported estimated values of stock options granted to CEOs and proceeds realized from exercising options over CEO tenures. An extensive literature has investigated issues related to measuring option values and we do not seek to contribute directly to this measurement literature. Instead, we consider how low quality estimation of option value affects evaluation and monitoring of CEO pay. We address two questions of interest to researchers and investors. First, we investigate differences in estimation errors across types of CEOs, specifically CEOs hired internally versus CEOs hired externally. This is relevant because a growing research literature comparing compensation of insider and outsider CEOs relies on estimated option values. Second, we investigate whether shareholders recognize the low quality of option value estimation for monitoring purposes. Our evidence indicates that shareholder activists did not correct for the effects of estimation bias when targeting firms through shareholder proposals and vote no campaigns related to executive pay.
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