How Employee Stock Options and Executive Equity Ownership Affect Long-Term IPO Stock Prices and Operating Performance
Posted: 16 Jan 2009
Date Written: January 13, 2009
This paper examines the longer-term performance of IPOs for several years (up to five years) after the expiration of the stabilization period. It seeks to determine whether the form of managerial compensation affects long-term performance after controlling for other influential factors previously uncovered in the IPO and compensation literature, such as executive cash compensation, profitability, age, size, venture capital backing, underwriter ranking, industry, book-to-market, analyst growth forecasts, and underpricing. We find that the performance of new public companies is best for companies that grant a combination of stock options and equity ownership. We offer a theoretical explanation for this result based on managerial risk aversion and the alignment of managerial and owner incentives.
Keywords: Initial public offerings, Stock options, Executive compensation
JEL Classification: G12, G32, J33
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