Why do some firms give stock options to all employees? An empirical examination of alternative theories

Paul Oyer, Scott Schaefer*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

203 Scopus citations

Abstract

Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: Providing incentives to employees, inducing employees to sort, and employee retention. We gather data from three sources on firms' stock option grants to middle managers. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. We also conduct a cross-sectional regression analysis of firms' option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.

Original languageEnglish (US)
Pages (from-to)99-133
Number of pages35
JournalJournal of Financial Economics
Volume76
Issue number1
DOIs
StatePublished - Apr 2005

Keywords

  • Employee compensation
  • Incentives
  • Retention
  • Sorting
  • Stock options

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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