Are employee stock option proceeds a source of finance for investment?

This paper investigates whether employee stock option proceeds, both executive and non-executive are employed by firms to finance investment by exploiting a quasi-natural experiment which mandated option expensing, SFAS 123R. We find that despite a fall in both executive and non-executive option grants and proceeds, investment has increased post-SFAS 123R. The investment's sensitivity to option proceeds remains constant or even decreases for non-executive option proceeds post-SFAS 123R implying that option proceeds are not an integral source of finance. Our results are not driven by the recent financial crisis as well as the changes in corporate governance and financial constraints over the sample period.