Stock Option Adoption and Irrational Exuberance: The Impact on Profitability

Sesil, James C.; Lin, Yu-Peng; Director, Steven M.

doi:10.2139/ssrn.873411

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Stock Option Adoption and Irrational Exuberance: The Impact on Profitability

29 Pages Posted: 4 Jan 2006

See all articles by James C. Sesil

Yu-Peng Lin

University at Buffalo - Department of Economics

Steven M. Director

Rutgers School of Management and Labor Relations - New Brunswick

Date Written: January 2, 2006

Abstract

We evaluate the impact of the adoption of stock options on firms' financial performance. If stock options are an efficient incentive contract we would expect their adoption to increase both operating income (OI) and return on assets (ROA). Alternatively, stock options may provide an incentive to focus too much on growth resulting in either lower OI or higher OI but lower ROA. We find evidence that stock options significantly increase OI and investments in assets but significantly decrease ROA.

Keywords: Executive and Broad-based Stock Options, Profitability

JEL Classification: J33, M52

Suggested Citation: Suggested Citation

Sesil, James C. and Lin, Yu-Peng and Director, Steven M., Stock Option Adoption and Irrational Exuberance: The Impact on Profitability (January 2, 2006). Available at SSRN: https://ssrn.com/abstract=873411 or http://dx.doi.org/10.2139/ssrn.873411