Employee Sentiment and Stock Option Compensation

Posted: 22 Nov 2006

See all articles by Nittai Bergman

Nittai Bergman

Tel Aviv University; National Bureau of Economic Research (NBER)

Dirk Jenter

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Abstract

The use of equity-based compensation for rank-and-file employees is a puzzle. We analyze whether the popularity of option compensation may be driven by employee optimism, and show that optimism by itself is insufficient to make option compensation optimal. The crucial insight is that firms compete with financial markets as suppliers of equity to employees and that employees' access to the equity market restricts firms' ability to profit from employee optimism. Firms must be able to extract some of the implied rents even though employees can purchase company equity in the financial markets. Such rent extraction becomes feasible if employees prefer the stock options offered by firms to the equity offered by the market, or if the traded equity is overvalued. We provide empirical evidence that firms use broad-based options compensation when boundedly rational employees are likely to be excessively optimistic about company stock, and when employees are likely to strictly prefer options over stock.

Keywords: Option compensation, equity compensation, employee sentiment, optimism

JEL Classification: G30, G39, J33, M52

Suggested Citation

Bergman, Nittai and Jenter, Dirk, Employee Sentiment and Stock Option Compensation. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=946469

Nittai Bergman

Tel Aviv University

Ramat Aviv
Tel-Aviv, 6997801
Israel

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dirk Jenter (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/jenter/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
877
PlumX Metrics