Performance Impact of Employee Stock Options

Market Valuation and Employee Stock Options

“…The proxy for financial constraints, KZ, has a significant positive coefficient, indicating that financially constrained firms grant more options. The ratio of R&D to assets has a significantly positive coefficient, consistent with the growth opportunity scenario by Kedia and Mozumdar (2002). The coefficient on marginal tax rate (TAX) is generally insignificant.…”

“…17 This measure of R&D expenses scaled by assets was used as proxy for growth opportunity by Kedia and Mozumdar (2002) and as proxy for capital needs by expected to use this form as a substitute for cash pay (Yermack,1995). It is expected that stock option compensation will be substituted for cash pay by companies with cash constraints, high capital needs and high costs of accessing capital markets.…”

“…However, some researchers consider BE/ME as a proxy for growth opportunities (Smith and Watts (1992)) and expect that firms with low BE/MEs have greater growth opportunities. Using this interpretation of book-to-market ratio, Kedia and Mozumdar (2002) argue that incentives are larger in firms with valuable growth opportunities, and that these firms might grant more options to align the incentives of employees with shareholders. consider firms with greater growth opportunities to have high capital needs and issue more options as a consequence.…”

A Review of Employee Stock Option Plans: Panacea or Pandora’s Box for Firm Performance

“…Tai (2001) examined the US firms during 1995-1999 and inferred that the convergence-of-interest hypothesis indicating the benefits arising from use of stock options are offset by the entrenchment hypothesis highlighting the costs associated with its use beyond the 1% threshold level. Further, Kedia and Mazumdar (2002) [32]examined the effect of use of stock options, for both executives and non-executives, on the abnormal stock returns for 200 of the largest Nasdaq firms from 1995-1998. It was revealed that firms that grant stock options to retain key employees and to ease out the financial constraints have shown improvement in firm value and resulted in positive abnormal returns.…”

How employee stock options and executive equity ownership affect long-term IPO operating performance

“…Our paper differs from previous papers that have investigated the relation between executive pay and future firm performance. Several studies correlate compensation measures with ex-post stock price performance (e.g., Masson, 1971;Abowd, 1990;DeFusco et al, 1991;Core et al, 1999;Kedia and Mozumdar, 2002;and Ittner et al, 2003). A major difficulty with this approach is that stock prices have embedded shareholder expectations.…”