Non-Executive Stock Options and Firm Performance
34 Pages Posted: 20 Mar 2007
Date Written: November 15, 2006
We examine whether options granted to rank and file employees have effects on the performance of the firm, by exploring the link between broad-based option grants, option portfolio implied incentives and firm operating performance. We employ an instrumental variables approach that combines information about the labor market characteristics in which firms compete with information on firm option programs from the Investor Responsibility Research Center to identify causal effects. Firms that broadly grant options to non-executive employees exhibit higher operating performance than firms that do not grant options broadly. We find a similar positive relationship between the implied incentives of the portfolio of outstanding non-executive options and subsequent firm operating performance. Consistent with economic theory, we find that the incentive-performance effect is larger in smaller firms, and in firms with higher growth opportunities and higher growth options per employee. Finally, we find that the performance effect is concentrated solely in firms that grant options broadly to non-executive employees, supporting the argument that options may induce monitoring among co-workers.
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