How Long Do Grantees Hold Onto Their ESOs?

Employee stock options (ESOs) are a compensation tool offered by companies to their employees, granting them the right to purchase shares of the company's stock at a predetermined price. ESOs serve as incentives for employees, aligning their interests with the company's success and long-term growth. Typically, these options have a vesting period, during which employees must remain with the company before exercising their options. Employee stock options can provide an additional source of income and a sense of ownership in the company, creating a win-win situation where motivated employees contribute to the firm's prosperity while sharing in its financial success.

ESOs serve as incentives for employees, prompting the question: how long do grantees hold onto their ESOs? This question is explored in Reference [1]. The author pointed out,

I find that employees who are less exposed to employer-specific risk due to their holdings in other listed companies tend to hold onto their options for longer. My large data set allows me to control for unobserved heterogeneity by verifying that my results hold among coworkers who are exposed to the same local and firm-level shocks, among employees who are unlikely to invest in mutual funds, and also within employee. Moreover, unique features of the institutional setting suggest that my estimates represent a credible lower bound to the effect of outside investments on the exercise of ESOs in other countries. Specifically, the effect of outside stock wealth is more pronounced when the options are less liquid and employer- specific risk is harder to diversify. An IV analysis exploiting the conversion of customer-owned mutual companies into publicly listed firms shows that the salience of outside wealth is also an important underlying mechanism.

Taken together, my results support the long-standing hypothesis that portfolio considerations play an important role in shaping the behavior of ESO grantees.

In short, the paper found that the behavior of ESO grantees hinges on external wealth, particularly in cases where the options have lower liquidity, and the diversification of employer-specific risk becomes more challenging. This result is in line with the concept that an investor's decision is influenced by their utility.

Let us know what you think in the comments below or in the discussion forum.

References

[1]  Matteo Vacca, Diversification at Work: Evidence from Employee Stock Options, 2023, https://ift.tt/GikqdIe

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