Accounting, Governance, and Broad-Based Stock Option Grants

Stanford GSB Research Paper No. 1821(R1)

32 Pages Posted: 29 Apr 2005

See all articles by Paul Oyer

Paul Oyer

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Scott Schaefer

University of Utah - Department of Finance

Date Written: March 2005

Abstract

We estimate the costs of broad-based stock option programs relative to cash compensation and restricted stock grants. Using detailed data on stock-option grants to middle managers, we first compute the cost of option grants under the assumption that grants are driven solely by the difference between their accounting and economic costs. Under this assumption, the median firm in our sample incurs $0.64 in real costs in order to increase reported pre-tax net income by $1. This cost is reduced, but is still quite substantial, if accounting considerations drive firms to grant stock options when grants of restricted stock would capture similar economic benefits. Finally, we examine the possible sources of economic benefits of broad-based option programs if observed grants are more profitable than restricted stock grants. We find that the choice of options over restricted stock is consistent with firms using equity grants to attract and retain employees, but not as a means of conserving cash.

JEL Classification: J33, G34, M41, M43

Suggested Citation

Oyer, Paul and Schaefer, Scott, Accounting, Governance, and Broad-Based Stock Option Grants (March 2005). Stanford GSB Research Paper No. 1821(R1), Available at SSRN: https://ssrn.com/abstract=707861 or http://dx.doi.org/10.2139/ssrn.707861

Paul Oyer (Contact Author)

Stanford Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Scott Schaefer

University of Utah - Department of Finance ( email )

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

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