Performance Impact of Employee Stock Options

37 Pages Posted: 25 Mar 2002  

Simi Kedia

Rutgers Business School

Abon Mozumdar

Virginia Polytechnic Institute & State University - Department of Finance

Date Written: January 2002

Abstract

In a sample of 200 large Nasdaq firms we examine the determinants of stock option grants and study whether options are associated with superior firm performance. We find that firms grant options in the face of financial constraints, to give incentives to increase firm value, and to hire and retain employees. We further find that grant of options to retain key employees and to relax financial constraints increases firm value and results in positive abnormal returns. However, there is little evidence that option grants to align employee incentives in high growth firms results in superior performance. There also exists some evidence that difficulty in the estimation of the true cost of stock options results in over estimation of firm value and abnormal returns, though this effect is confined only to the case when Fama-French size and book-to-market portfolios are used as reference portfolios.

Keywords: stock options, firm performance, incentives

JEL Classification: J33, D23

Suggested Citation

Kedia, Simi and Mozumdar, Abon, Performance Impact of Employee Stock Options (January 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=304188 or http://dx.doi.org/10.2139/ssrn.304188

Simi Kedia (Contact Author)

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Abon Mozumdar

Virginia Polytechnic Institute & State University - Department of Finance ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
703-538-8414 (Phone)
703-538-8415 (Fax)

HOME PAGE: http://www.nvc.vt.edu/abon

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