Does CEO's Holding of Vested Options Measure Overconfidence?

Option-based measures of overconfidence are widely used as proxies for overconfidence in corporate finance. Overexposure of a CEO's wealth to the firm's idiosyncratic risk is taken as a sign of CEO overconfidence. The literature has used the measures to study the effect of managerial overconfidence on corporate investment, financial policy, innovation and merger and acquisition. The belief is that overconfident CEOs behave differently. We trace CEOs across firms to investigate whether option exercise decisions correlate with firm characteristics. We find that a CEO's decision to hold or exercise vested options is considerably driven by firm and market conditions. Our analysis casts doubt on the view that repeated holding of in-the-money options solely captures overconfidence.