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

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.