The significance of stock options as a component of executive compensation
has fluctuated dramatically over the past decade. The purpose of this study is to investigate
determinants of the effectiveness of stock option grants. These option grants are
considered to be effective if they accomplish their intended role of enhancing firm
value by inducing risk-taking behavior.
Using data from 2,349 firms that granted stock options to their Chief Executive
Officer (CEO) between 1992 and 2001, the relationship between the options granted
and subsequent firm value was examined. This study found no universal positive association
between option grants and firm value. However, CEO incentive equilibrium,
defined as stability in the CEOâÂÂs stock and option portfolio sensitivity to stock price,
was found to influence the association between stock option grants and firm value. The
positive association between grants and firm value was evidenced for the sub-sample
of firms that demonstrate disequilibrium in CEO incentives. This was not the case,
however, for the CEO incentive equilibrium sub-sample. This finding indicates that the positive valuation impact of stock option grants is highest for those firms that demonstrate
a trend of increasing CEO portfolio sensitivity to stock price.
High CEO portfolio sensitivity to equity risk was not found to interact with
grant sensitivity to equity risk in a manner that reduces firm value. Thus, this study did
not find support for the hypothesis that, ceteris paribus, grants further reduce CEO diversification,
and interact with portfolio sensitivity to reduce incentives for risk-taking.
Consistent with Lambert, Larcker and Verrecchia (1991), however, a high level of uncorrelated
wealth is found to interact with grant sensitivity to equity risk so as to increase
the positive impact of grant sensitivity on firm value.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/5011 |
| Date | 25 April 2007 |
| Creators | Weber, Catherine Krueger |
| Contributors | Strawser, Robert H. |
| Publisher | Texas A&M University |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Dissertation, text |
| Format | 605562 bytes, electronic, application/pdf, born digital |
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