Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories
Research Paper Series Paper No. 1772(R)
47 Pages Posted: 29 Jan 2003
Date Written: February 2004
Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms' stock option grants to middle managers from three distinct sources, and use two methods to assess which theories appear to explain observed granting behavior. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. Second, we conduct a cross-sectional regression analysis of firms option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.
JEL Classification: J31, J33, L23, M40, M46, M50, G32
Suggested Citation: Suggested Citation