Stock Option Plans for Non-Executive Employees

Abstract

We examine determinants of non-executive employee stock option holdings, grants, and exercises for 756 firms during 1994-1997. We find that firms use greater stock option compensation when facing capital requirements and financing constraints. Our results are also consistent with firms using options to attract and retain certain types of employees as well as to create incentives to increase firm value. After controlling for economic determinants and stock returns, option exercises are greater (less) when the firm's stock price hits 52-week highs (lows), which confirms in a broad sample the psychological bias documented by Heath et al. ABSTRACTWe examine determinants of non-executive employee stock options outstanding, grants, and exercises for 756 firms during 1994 to 1997. We find that firms use greater stock option compensation when facing capital requirements and financing constraints. Our results are also consistent with firms using options to attract certain types of employees, provide retention incentives, and create incentives to increase firm value. After controlling for economic determinants and stock returns, option exercises are greater (less) when the firm's stock price hits 52-week highs (lows), which confirms in a broad sample the psychological bias documented by Heath, Huddart, and Lang (1999).

A review of the empirical disclosure literature: discussion

“…Brennan and Subramanyam's (1995) simultaneous-equations model provides evidence of this endogenous (Baker and Hall, 1998). Further, options owned by the executives who are likely to make disclosure decisions constitute a small fraction of shares reserved for options (Core and Guay, 2001).…”

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

“…Later, Hall and Liebman (1998) [22] established that value of stocks options owned by the CEO helps enhance the firm's performance. Core and Guay (2001) [12]credited stock options as a mechanism of motivating employees and improving firm value. Sesil, Kroumova, Blasi, and Kruse (2002) [53]pointed out that issuance stock options by the new economy firms (i.e., software, hightechnology manufacturing, pharmaceuticals and semiconductor) results in better performance.…”

Management of Knowledge Workers

“…Monitoring of workers can be particularly costly when the …rm is larger, more decentralized, there is more noise in the business environment, and the …rm has greater growth opportunities (Core and Guay, 2001, Demsetz and Lehn, 1985, Jensen and Meckling, 1992, and Smith and Watts, 1992. On the other hand, transparent and small …rms may be in a better position to assess the quality of new worker ideas.…”