Stock Option Plans for Non-Executive Employees

50 Pages Posted: 15 Feb 2000

See all articles by John E. Core

John E. Core

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

Wayne R. Guay

University of Pennsylvania - Accounting Department

Multiple version iconThere are 3 versions of this paper

Date Written: August 2000

Abstract

We examine the determinants of options outstanding, grants, and exercises by non-executive employees. Using hand-collected data on options outstanding, grants, and exercises for a broad cross-section of 795 large firms for the years 1994 to 1997, we create measures of option values and incentives for both executive (top 5) employees and non-executive employees. We find that firms have committed large fractions of firm value to option plans, that a majority of these options are distributed to non-executives, and that substantial cross-sectional variation exists with respect to the fraction of the option plan that is distributed to non-executives.

We provide strong evidence that firms use options to a greater extent when they face capital requirements and financing constraints. This finding is consistent with cash constrained firms using stock option compensation in lieu of cash compensation. Our empirical results are also broadly consistent with the hypothesis that options held by non-executives vary as predicted by theory relating the distribution of equity incentives to firm characteristics. However, we find little evidence that firms manage the level of option plan incentives through the annual grant of options, suggesting that the corporate use of non-executive option plans is still evolving. In our cross-sectional regressions of annual exercises, we find strong evidence that the psychological reference point bias documented by Heath, Huddart, and Lang (1999) is valid in a broad sample of large corporations.

JEL Classification: G32, J33, J41, M41

Suggested Citation

Core, John E. and Guay, Wayne R., Stock Option Plans for Non-Executive Employees (August 2000). Available at SSRN: https://ssrn.com/abstract=205429 or http://dx.doi.org/10.2139/ssrn.205429

John E. Core (Contact Author)

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

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Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

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Philadelphia, PA 19104-6365
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215-573-2054 (Fax)

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