Corporate Life Cycle and CEO Stock Options Grants

Abstract

We document that the relation between the proportion of stock options in CEOs' compensation and its economic determinants identified in prior research is more pronounced for firms in the growth stage of their life cycle than for firms in their stagnant and mature stages. We also document that firms in their growth stage earn significantly more than one dollar in future operating income for each dollar of stock options granted to their CEOs, whereas stagnant and mature firms do not. These results suggest that stock options grants to CEOs of firms in their growth stage have an incentive alignment effect as predicted by agency theory. On the other hand, stock options grants to CEOs of firms in their stagnant and mature stages do not provide equity holders with incremental benefits.

Keywords: Executive compensation, stock options, life cycle, incentives, performance