Abstract

http://ssrn.com/abstract=318101
 
 

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Are Executive Stock Options Associated with Future Earnings?


Michelle Hanlon


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Shivaram Rajgopal


Emory University - Goizueta Business School

Terry J. Shevlin


University 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 series





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Date posted: January 6, 2004  

Suggested Citation

Hanlon, Michelle and Rajgopal, Shivaram and Shevlin, Terry J., Are Executive Stock Options Associated with Future Earnings? (December 20, 2002). JAE Boston Conference October 2002. Available at SSRN: http://ssrn.com/abstract=318101 or http://dx.doi.org/10.2139/ssrn.318101

Contact Information

Michelle Hanlon (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
617-253-9849 (Phone)
Shivaram Rajgopal
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
Terry J. Shevlin
University of California-Irvine ( email )
Paul Merage School of Business
Irvine, CA 92697-3125
United States
206-550-9891 (Phone)
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