Non-Executive Stock Options and Firm Performance

34 Pages Posted: 20 Mar 2007

See all articles by Yael V. Hochberg

Yael V. Hochberg

National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Laura Anne Lindsey

Arizona State University (ASU) - Finance Department

Date Written: November 15, 2006

Abstract

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.

Suggested Citation

Hochberg, Yael V. and Lindsey, Laura Anne, Non-Executive Stock Options and Firm Performance (November 15, 2006). Available at SSRN: https://ssrn.com/abstract=972655 or http://dx.doi.org/10.2139/ssrn.972655

Yael V. Hochberg (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Laura Anne Lindsey

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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