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Employee stock options and future firm performance: Evidence from option repricings

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  • Aboody, David
  • Johnson, Nicole Bastian
  • Kasznik, Ron
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    Abstract

    We investigate firms' operating performance subsequent to the repricing of executive and non-executive employee stock options. We find that, relative to non-repricers, repricing firms have a larger increase in operating income and cash flows in subsequent periods. This performance improvement is attributable to the underlying economic determinants of the decision to restore the options' incentive properties. However, only repricings of executive stock options are associated with improvement in performance; we find no such evidence for non-executive employees. Our findings suggest employee stock options provide sufficiently large incentive effects to favorably affect firms' performance, but primarily so at the executive level.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 50 (2010)
    Issue (Month): 1 (May)
    Pages: 74-92

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    Handle: RePEc:eee:jaecon:v:50:y:2010:i:1:p:74-92

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Employee stock options Firm performance Option repricing;

    References

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    1. Brian J. Hall & Kevin J. Murphy, 2000. "Stock Options for Undiversified Executives," NBER Working Papers 8052, National Bureau of Economic Research, Inc.
    2. Core, John E. & Guay, Wayne R., 2001. "Stock option plans for non-executive employees," Journal of Financial Economics, Elsevier, vol. 61(2), pages 253-287, August.
    3. Oyer, Paul & Schaefer, Scott, 2004. "Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories," Research Papers 1772r, Stanford University, Graduate School of Business.
    4. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
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    8. Aboody, David & Barth, Mary E. & Kasznik, Ron, 1999. "Revaluations of fixed assets and future firm performance: Evidence from the UK1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 149-178, January.
    9. Paul Oyer, 2004. "Why Do Firms Use Incentives That Have No Incentive Effects?," Journal of Finance, American Finance Association, vol. 59(4), pages 1619-1650, 08.
    10. Ittner, Christopher D. & Lambert, Richard A. & Larcker, David F., 2003. "The structure and performance consequences of equity grants to employees of new economy firms," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 89-127, January.
    11. Hanlon, Michelle & Rajgopal, Shivaram & Shevlin, Terry, 2003. "Are executive stock options associated with future earnings?," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 3-43, December.
    12. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    13. Hillegeist, Stephen A. & PeƱalva, Fernando, 2004. "Stock option incentives and firm performance," IESE Research Papers D/535, IESE Business School.
    14. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    15. Carter, Mary Ellen & Lynch, Luann J., 2003. "The consequences of the FASB's 1998 proposal on accounting for stock option repricing," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 51-72, April.
    16. Carter, Mary Ellen & Lynch, Luann J., 2004. "The effect of stock option repricing on employee turnover," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 91-112, February.
    17. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    18. Coles, Jeffrey L. & Hertzel, Michael & Kalpathy, Swaminathan, 2006. "Earnings management around employee stock option reissues," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 173-200, April.
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    Cited by:
    1. Larcker, David F. & McCall, Allan L. & Ormazabal, Gaizka, 2013. "Proxy advisory firms and stock option repricing," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 149-169.

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