Non-executive Employee Stock Options and Corporate Innovation

Abstract:     
We provide empirical evidence on the positive effect of non-executive employee stock options on corporate innovation. The positive effect is more pronounced when employees are more important for innovation, when free-riding among employees is weaker, when options are granted broadly to most employees, when the average expiration period of options is longer, and when employee stock ownership is lower. Taken together, our results are consistent with the view that stock options granted to non-executive employees increase risk-taking incentive, enhance failure-bearing capacity, encourage long-term commitment, and promote teamwork of employees, leading to greater innovation success.

Number of Pages in PDF File: 46

Keywords: Employee Stock Options; Corporate Innovation; Risk-taking Incentives; Employee Compensation

JEL Classification: J33, M52, O31

working papers series