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This study investigates the effect of stock option-based compensation for management on the short-term market reaction. The idea of the positivist approach of the agency theory is that granting stocks to employees in general, but mostly to executives, and making them stockholders as well, brings value to the other stockholders. Moreover, since stock option grants and stock awards in Croatia are not as common as in the developed capital markets, stock grants can also be a sign for a firm that invests more resources into their human resources management thus attracting quality management. On average, only 3% of the listed firms in Croatia have been granting stock options compared to as much as 70% in the USA. Croatian firms do not directly publish their stock option plans. The data on managerial stock options consists of notifications from Zagreb Stock Exchange (“ZSE”) of all Croatian publicly quoted firms during June 2010–May 2021. During this period there were 827 notifications on employees’ transactions. These notifications include all the dispositions and acquisitions by employees on the ZSE. In order to apply event study test methods for this purpose, after being filtered, 47 notifications on stock option exercises are used. To the best of our knowledge, this is the first empirical evidence describing the market reaction following stock option based-compensation on the ZSE. The results are statistically significant and they indicate that stock options to managers are perceived negatively by the market in the short term. Hence, we can confirm that stock option exercises do convey information to the market, but we cannot confirm that stock option exercises bring value to the other stockholders in the short term. The possible explanation is that investors on the Croatian market do not find stock option grants as convergence of the interests of managers and stockholders, but rather as an additional expense for the firm. [ABSTRACT FROM AUTHOR]