Costs of broad-based stock option plans

Oyer, Paul; Schaefer, Scott

doi:10.1016/j.jfi.2005.09.003

Cited by 38 publications

(17 citation statements)

References 21 publications

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“…Indeed, Oyer and Schaefer (2005b) report that the median firm may have been willing to incur real costs of up to between $0.50 and $1 to issue options and save $1 in compensation expense.…”

Section: Introductionmentioning

confidence: 99%

The Role of Accounting in the Design of CEO Equity Compensation

Carter

Lynch

Tuna

2007

The Accounting Review

277

145

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______________________________________________________________________________We examine the role of accounting in firms' equity compensation choices for CEOs. Studying ExecuComp firms in 1995-2001, we find that financial reporting concerns are positively associated with the use of options and negatively associated with the use of restricted stock. We also find that financial reporting concerns are positively associated with total CEO compensation. These results are consistent with the previously available favorable accounting treatment for stock options influencing firms' choices related to equity compensation. To corroborate our findings, we examine changes in CEO compensation in firms that begin to expense options in 2002 and 2003. We find that these firms reduce the use of options and increase the use of restricted stock after they start expensing options. We find, however, that these firms do not reduce overall CEO compensation. Results suggest that favorable accounting treatment for stock options led to a higher use of options and lower use of restricted stock than would have been the case absent accounting considerations. That we detect no decrease in total CEO compensation upon expensing options suggests that firms find it difficult to downsize hefty executive pay packages that may have resulted from the favorable accounting treatment for options. The results confirm that financial reporting costs play a role in determining CEO compensation. ______________________________________________________________________________ Luann Lynch gratefully acknowledges the financial support of the University of Virginia Darden School Foundation. We thank IBES for providing analyst forecast data. We thank John Core,

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“…Indeed, Oyer and Schaefer (2005b) report that the median firm may have been willing to incur real costs of up to between $0.50 and $1 to issue options and save $1 in compensation expense.…”

Section: Introductionmentioning

confidence: 99%

The Role of Accounting in the Design of CEO Equity Compensation

Carter

Lynch

Tuna

2007

The Accounting Review

277

145

View full text Add to dashboard Cite

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“…Moreover, hedging the risk inherent in their options is difficult, costly, and therefore practically infeasible for lower-level employees. Hence, employees are left with firm-specific risk they cannot diversify, which leads to potentially substantial risk premia in standard models (see Oyer and Schaefer (2006) for an estimate of these risk premia).…”

Section: Introductionmentioning

confidence: 99%

“…The two papers most closely related are Barberis and Huang (2008), who analyze the impact of cumulative prospect theory and probability weighting on asset prices, and Polkovnichenko (2005), who shows that probability weighting is quantitatively consistent with 6 Consistent with the theoretical difference, I find in my regressions that including past stock returns as a proxy variable for investor sentiment, as in Bergman and Jenter (2007), has no effect on the positive relation between stock options and firm volatility predicted by the probability weighting model. 7 Oyer and Schaefer (2006) calibrate a related model in which employees are optimistic about their firm's returns and find that such a model predicts that firms with lower stock volatility can more efficiently grant stock options. Even if one were willing to make the additional assumption that employees in volatile firms are systematically more optimistic, the required degree of optimism (Oyer and Schaefer (2006) report that for the typical firm in their sample an employee with constant relative risk aversion utility and ρ = 2.5 (a very low estimate) would need to overestimate expected returns by 200%) appears too large to be plausible for average companies.…”

Section: Introductionmentioning

confidence: 99%

“…7 Oyer and Schaefer (2006) calibrate a related model in which employees are optimistic about their firm's returns and find that such a model predicts that firms with lower stock volatility can more efficiently grant stock options. Even if one were willing to make the additional assumption that employees in volatile firms are systematically more optimistic, the required degree of optimism (Oyer and Schaefer (2006) report that for the typical firm in their sample an employee with constant relative risk aversion utility and ρ = 2.5 (a very low estimate) would need to overestimate expected returns by 200%) appears too large to be plausible for average companies. observed household investment patterns.…”

Section: Introductionmentioning

confidence: 99%

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Probability Weighting and Employee Stock Options

Spalt¹

2013

J. Financ. Quant. Anal.

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This paper documents that riskier firms with higher idiosyncratic volatility grant more stock options to nonexecutive employees. Standard models in the literature cannot easily explain this pattern; a model in which a risk-neutral firm and an employee with prospect theory preferences bargain over the employee's pay package can. The key feature that makes stock options attractive is probability weighting. The model fits the data on option grants well when calibrated using standard parameters from the experimental literature. The results are the first evidence that risky firms can profitably use stock options to cater to an employee demand for long-shot bets. * Spalt, o.g.spalt@uvt.nl,

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“…Existing literature on broad‐based stock option plans has focused on the use of stock options as a device to provide incentives, to attract and retain qualified employees, and to substitute for cash compensation in financially constrained firms (e.g., Yermack (1995), Core and Guay (2001), Kato et al (2005), and Oyer and Schaefer (2005a, 2005b)). Our analysis points to an additional link between compensation and financing policy that to our knowledge has not been studied in the prior literature.…”

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confidence: 99%

Employee Stock Options and Investment

Babenko¹,

Lemmon²,

Tserlukevich

2011

The Journal of Finance

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Exercises of employee stock options generate substantial cash inflows to the firm. These cash inflows substitute for costly external finance in those states of the world in which the demand for investment is high. Using the fact that the proceeds from option exercises exhibit a distinct nonlinearity around the point where options fall out of the money, we estimate that firms increase investment by $0.34 for each dollar received from the exercise of stock options. Firms that face higher external financing costs allocate more of the proceeds from option exercises to investment.

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Costs of broad-based stock option plans

Cited by 38 publications

References 21 publications

The Role of Accounting in the Design of CEO Equity Compensation

The Role of Accounting in the Design of CEO Equity Compensation

Probability Weighting and Employee Stock Options

Employee Stock Options and Investment

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