An Empirical Examination of the Costs and Benefits of Executive Stock Options: Evidence from Japan

Journal of Financial Economics, Vol. 78, pp. 435–461, 2005

27 Pages Posted: 18 Apr 2012

See all articles by Hideaki Kiyoshi Kato

Hideaki Kiyoshi Kato

Nagoya University - Graduate School of Economics

Michael Lemmon

University of Utah - Department of Finance

Mi Luo

Villanova University

Jim Schallheim

University of Utah - Department of Finance

Date Written: April 17, 2012

Abstract

In May 1997, the Japanese Commercial Code was amended to allow firms to begin granting stock options as compensation to top management and employees. Nearly 350 firms adopted option-based compensation plans between 1997 and 2001. These options typically have five year lives and are out-of-the-money by about 5% at the grant date. Firms exhibit abnormal stock returns of about 2% around the announcements of plan adoptions. We find improvements in operating performance and observe that dividend policy and volatility remain unchanged post-adoption. Our evidence suggests that well-designed incentive compensation plans are consistent with the creation of shareholder value.

Suggested Citation

Kato, Hideaki K. and Lemmon, Michael and Luo, Mi and Schallheim, James S., An Empirical Examination of the Costs and Benefits of Executive Stock Options: Evidence from Japan (April 17, 2012). Journal of Financial Economics, Vol. 78, pp. 435–461, 2005. Available at SSRN: https://ssrn.com/abstract=2041088

Hideaki K. Kato (Contact Author)

Nagoya University - Graduate School of Economics ( email )

1 Furo-cho
Chikusa-ku
Nagoya 464-8601, 464-8601
Japan
+81-52-789-4928 (Phone)
+81-52-789-4928 (Fax)

Michael Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Mi Luo

Villanova University ( email )

Villanova, PA 19085
United States

James S. Schallheim

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-581-4434 (Phone)
801-581-7214 (Fax)

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