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Are Executive Stock Options Associated with Future Earnings?Michelle HanlonMassachusetts Institute of Technology (MIT) - Sloan School of Management Shivaram RajgopalEmory University - Goizueta Business School Terry J. ShevlinUniversity of California-Irvine December 20, 2002 JAE Boston Conference October 2002 Abstract: We estimate the relation between top 5 executive stock option (ESO) grants and future earnings to examine whether incentive alignment or rent extraction by top managers explains option granting behavior. The future operating income associated with a dollar of Black-Scholes value of an ESO grant is $3.82. To understand the source of these positive payoffs, we parse out ESO grant value into components predicted by economic determinants of option grants, governance quality, and a residual grant value. The payoffs to ESOs appear to be driven predominantly by the economic determinants of ESO grants and not poor governance quality. Thus we find little evidence in support of rent extraction.
Number of Pages in PDF File: 61 Keywords: management compensation, stock options, incentive alignment, rent extraction JEL Classification: G30, J33, M41 working papers seriesDate posted: January 6, 2004Suggested CitationContact Information
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