Revisiting Stock Option Exercise and CEO Overconfidence

A growing body of literature argues that CEOs are irrationally overconfident. I find that the most commonly used measure of overconfidence, holding deep-in-the-money options, may be less of a behavioral bias than previously thought. CEOs who hold deep-in-the-money options make a substantial profit, consistently earning returns above the S&P 500 with significant Fama-French five-factor alphas. Previous literature has also shown that holding deep-in-the-money options is correlated with greater innovation. I find that the relationship does not seem to be causal.