We examine the determinants and consequences of the split of options between executive and nonexecutive employees. We find that the lower the proportion of options granted to executives is, the stronger firm governance is. For the sample as a whole, the relation between options and both operating income and valuation is weaker for executive options than for options to lower-level employees. Splitting the sample between weak and strong governance firms, for the weak (strong) governance firms, the relation between executive options and firm performance and valuation is weaker (stronger) relative to nonexecutive options. Results are robust to controls for the endogeneity of option-granting choice. Taken as a whole, our results suggest that firms with relatively weak governance tend to give a larger proportion of options to executives and appear to receive relatively less benefit from those options.
AboodyD.BarthM.E.KasznikR.. 2004. “SFAS 123 Stock-Based Compensation Expense and Equity Market Values”. The Accounting Review, 79: 251–276.
2.
AshbaughH.CollinsD.LaFondR.. 2006. “The Effects of Corporate Governance on Firms' Credit Ratings”. Journal of Accounting and Economics, 42: 203–243.
3.
BarthM.E.BeaverW.H.HandJ.M.LandsmanW.R.. 1999. “Accruals, Cash Flows, and Equity Values”. Review of Accounting Studies, 4: 205–229.
4.
BarthM.E.BeaverW.H.HandJ.M.LandsmanW.R.. 2005. “Accruals, Accounting-Based Valuation Models, and the Prediction of Equity Values”. Journal of Accounting, Auditing, and Finance, 20: 311–345.
5.
BebchukL.CohenA.. 2005. “The Cost of Entrenched Boards”. Journal of Financial Economics, 78: 409–433.
6.
BebchukL.FriedJ.. 2004. “Pay without Performance: The Unfulfilled Promise of Executive Compensation”. Cambridge, MA: Harvard University Press.
7.
BellT.B.LandsmanW.R.MillerB.L.YehS.. 2002. “The Valuation Implications of Employee Stock Option Accounting for Profitable Computer Software Firms”. The Accounting Review, 77: 971–996.
8.
BergstresserD.DesaiM.RauhJ.. 2006. “Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions”. Quarterly Journal of Economics, 121: 157–195.
9.
BergstresserD.PhilipponT.. 2006. “CEO Incentives and Earnings Management”. Journal of Financial Economics, 80: 511–529.
10.
BowenR.RajgopalS.VenkatachalamM.. 2004. “Accounting Discretion, Corporate Governance, and Firm Performance”. Working paper, University of Washington.
11.
BrownL.D.CaylorM.L.. 2006. “Corporate Governance and Firm Valuation”. Journal of Accounting and Public Policy, 25: 409–434.
12.
CallaghanS.R.StanfordM.SubramaniamC.. 2006. “Do Broad-Based Option Compensation Plans Improve Future Firm Performance for Technology and Non-Technology Firms?” Working paper, Texas Christian University.
13.
CarterM. E.LynchL. J.. 2003. “The Consequences of the FASB's 1998 Proposal on Accounting for Stock Option Re-pricing”. Journal of Accounting & Economics, 35: 51–72.
14.
CollinsD.W.MaydewE.L.WeissI.S.. 1997. “Changes in the Value-Relevance of Earnings and Equity Book Values over the Past Forty Years”. Journal of Accounting and Economics, 24: 39–67.
15.
CoreJ.GuayW.. 2001. “Stock Option Plans for Non-executive Employees”. Journal of Financial Economics, 61: 253–287.
16.
CoreJ.GuayW.RusticusT.. 2006. “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations”. Journal of Finance, 61: 655–687.
17.
CoreJ.GuayW.ThomasR.. 2005. “Is U.S. CEO Compensation Inefficient Pay without Performance?”Michigan Law Review, 103: 1142–1185.
18.
CoreJ.HolthausenR.LarckerD.. 1999. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance”. Journal of Financial Economics, 51: 371–406.
19.
DechowP.M.HuttonA.P.SloanR.G.. 1999. “An Empirical Assessment of the Residual Income Valuation Model”. Journal of Accounting and Economics, 26: 1–34.
20.
EricksonM.HanlonM.MaydewE.. 2006. “Is There a Link between Executive Compensation and Accounting Fraud?”Journal of Accounting Research, 44: 113–143.
21.
FamaE.F.FrenchK.R.. 1998. “Taxes, Financing Decisions, and Firm Value”. Journal of Finance, 53: 819–843.
22.
FASB (Financial Accounting Standards Board). 1995. Statement of Financial Accounting Standards No. 123: Accounting for Stock-Based Compensation. Norwalk, CT: FASB.
23.
GompersP.A.IshiiJ.L.MetrickA.. 2003. “Corporate Governance and Equity Prices”. Quarterly Journal of Economics, 118: 107–155.
24.
HallB.J.MurphyK. J.. 2002. “Stock Options for Undiversified Executives”. Journal of Accounting & Economics, 33: 3–42.
25.
HallB.J.MurphyK. J.. 2003. “The Trouble with Stock Options”. Journal of Economic Perspectives, 17 (3): 49–72.
26.
HanlonM.RajgopalS.ShevlinT.. 2003. “Are Executive Stock Options Associated with Future Earnings?”Journal of Accounting and Economics, 36: 3–43.
27.
HausmanJ.1978. “Specification Tests in Econometrics”. Econometrica, 46: 1251–1271.
28.
HausmanJ.1983. “Specification and Estimation of Simultaneous Equations Models”. In: Handbook of Econometrics, edited by GrilichesZ.IntriligatorM.. Amsterdam: North-Holland.
29.
IttnerC.LambertR.LarckerD.. 2003. “The Structure and Performance Consequences of Equity Grants to Employees of New Economy Firms”. Journal of Accounting and Economics, 34: 89–127.
30.
KmentaJ.1971. Elements of Econometrics.New York: Macmillan Publishing Company.
31.
KothariS.P.ZimmermanJ.. 1995. “Price and Return Models”. Journal of Accounting and Economics, 20: 155–192.
32.
LarckerD.2003. “Discussion of ‘Are Executive Stock Options Associated with Future Earnings?’”Journal of Accounting and Economics, 36: 45–50.
33.
MeulbroekL.K.2001. “The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options”. Financial Management, 30: 5–30.
34.
OhlsonJ.A.1995. “Earnings, Equity Book Values, and Dividends in Equity Valuation”. Contemporary Accounting Research, 11 (2): 661–687.
35.
OyerP.2004. “Why Do Firms Use Incentives That Have No Incentive Effects”. Journal of Finance, 59: 1619–1650.
36.
OyerP.SchaeferS.. 2005. “Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories”. Journal of Financial Economics, 76: 99–133.
37.
RajgopalS.ShevlinT.. 2002. “Empirical Evidence on the Relation between Stock Option Compensation and Risk Taking”. Journal of Accounting and Economics, 33:145–171.
