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Employee Stock Options and Investment
Author(s) -
BABENKO ILONA,
LEMMON MICHAEL,
TSERLUKEVICH YURI
Publication year - 2011
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2011.01657.x
Subject(s) - liberian dollar , stock (firearms) , finance , investment (military) , cash , business , monetary economics , stock options , cash flow , economics , mechanical engineering , politics , political science , law , engineering
Exercises of employee stock options generate substantial cash inflows to the firm. These cash inflows substitute for costly external finance in those states of the world in which the demand for investment is high. Using the fact that the proceeds from option exercises exhibit a distinct nonlinearity around the point where options fall out of the money, we estimate that firms increase investment by $0.34 for each dollar received from the exercise of stock options. Firms that face higher external financing costs allocate more of the proceeds from option exercises to investment.