50 Pages Posted: 19 Apr 2008 Last revised: 27 Nov 2008
We find that fixed effects related to the location of a firm's headquarters explain variation in broad based option grants after controlling for industry effects and firm characteristics traditionally known to affect option granting. Location matters because of local labor market conditions and social interaction with neighboring firms. Broad based option grants are higher (i) when the firm's stock prices co-move more with stock prices of other firms located in that Metropolitan Statistical Area (MSA); (ii) in states that are less likely to enforce non-compete agreements; and (iii) in MSAs where employees prefer options because firms there have enjoyed abnormally high stock returns. Social influence affects broad based option grants because firms grant more options to rank and file workers when other firms in the MSA grant more broad based options. The neighborhood's option granting practices matter most when the firm is located in a region with a highly educated work force. All results with the exception of the impact of non-compete agreements hold when firms located in California are excluded. However, these results do not hold for top executive option grants.
Keywords: stock options, location, labor market, social interaction
JEL Classification: J33, G12, J41, J62, M40, M41, M46
Suggested Citation: Suggested Citation
Kedia, Simi and Rajgopal, Shivaram, Neighborhood Matters: The Impact of Location on Broad Based Stock Option Plans. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1122543