The Trouble with Stock Options

41 Pages Posted: 23 Jun 2003 Last revised: 4 Nov 2010

See all articles by Brian J. Hall

Brian J. Hall

NOM Unit Head, Harvard Business School; National Bureau of Economic Research (NBER)

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003

Abstract

The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.

Suggested Citation

Hall, Brian and Murphy, Kevin J., The Trouble with Stock Options (June 2003). NBER Working Paper No. w9784. Available at SSRN: https://ssrn.com/abstract=418286

Brian Hall (Contact Author)

NOM Unit Head, Harvard Business School ( email )

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Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

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USC Gould School of Law

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