Robert Tumarkin is Senior Lecturer of Finance at the University of New South Wales. This post is based on an article authored by Professor Tumarkin and Rik Sen, Assistant Professor of Finance at the Hong Kong University of Science and Technology.
Optimism shows up as a pervasive bias in experimental and real-life settings. In the business world, executive optimism is believed to influence a wide range of corporate decisions and policies. However, determining whether an executive is optimistic is not straightforward. Corporate communications featuring key executives can be heavily rehearsed, with words carefully chosen to hide any biases. Interviews with executives may reveal the biases of journalists more than that of the executives.
In our paper, Stocking Up: Executive Optimism, Option Exercise, and Share Retention, recently featured in the Journal of Financial Economics, we propose a robust empirical measure of executive optimism. This measure, which we call Share retainer, is based on observing an executive’s stock transactions that coincide with option exercise. It is motivated by our examination of the optimal option exercise and portfolio choice problem of an optimistic executive who faces a short-sale constraint on company stock.
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