Advanced Search
MyIDEAS: Login

Who benefits from a bull market? an analysis of employee stock option grants and stock prices

Contents:

Author Info

  • Nellie Liang
  • Scott Weisbenner
Registered author(s):

    Abstract

    Stock option grants to top executives and to employees below the top executive ranks have risen rapidly with stock prices in recent years. This paper examines the growth in stock option grants at S&P 1500 companies between 1996 and 1999, and estimates the pay-for-performance sensitivities of the value of new option grants for top executives and, separately, for employees below the top executive levels. In our framework, options are a reward for past performance, leading to a positive relationship between firms' stock prices and the value of new option grants. We find substantial sensitivities for both sets of employees, but they are larger for employees below the top executive levels. Moreover, in contrast to top executives, the sensitivities for employees below the senior management levels do not differ by whether firm stock prices have risen or fallen. The greater sensitivity of option grant values to stock prices for employees below the top ranks is consistent with greater demand for options following price increases, and less willingness to accept options when past performance has been poor. We also find that new grants at larger firms are related to industry performance, consistent with more competitive markets for top executive talent to manage large organizations as industry conditions improve.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.federalreserve.gov/pubs/feds/2001/200157/200157abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2001/200157/200157pap.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-57.

    as in new window
    Length:
    Date of creation: 2001
    Date of revision:
    Handle: RePEc:fip:fedgfe:2001-57

    Contact details of provider:
    Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
    Web page: http://www.federalreserve.gov/
    More information through EDIRC

    Order Information:
    Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

    Related research

    Keywords: Stock - Prices ; Stocks;

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Aboody, David, 1996. "Market valuation of employee stock options," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 357-391, October.
    2. DeFusco, Richard A & Johnson, Robert R & Zorn, Thomas S, 1990. " The Effect of Executive Stock Option Plans on Stockholders and Bondholders," Journal of Finance, American Finance Association, vol. 45(2), pages 617-27, June.
    3. Mark C. Anderson & Rajiv D. Banker & Sury Ravindran, 2000. "Executive Compensation in the Information Technology Industry," Management Science, INFORMS, vol. 46(4), pages 530-547, April.
    4. Brian J. Hall, 1998. "The Pay to Performance Incentives of Executive Stock Options," NBER Working Papers 6674, National Bureau of Economic Research, Inc.
    5. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August.
    6. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
    7. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-99, December.
    8. Scott J. Weisbenner, 2000. "Corporate share repurchases in the 1990s: what role do stock options play?," Finance and Economics Discussion Series 2000-29, Board of Governors of the Federal Reserve System (U.S.).
    9. David Yermack, 1996. "Good Timing: CEO Stock Option Awards and Company News Announcements," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-41, New York University, Leonard N. Stern School of Business-.
    10. 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.
    11. 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.
    12. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    13. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    14. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are Ceos Rewarded For Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 901-932, August.
    15. J. Nellie Liang & Steven A. Sharpe, 1999. "Share repurchases and employee stock options and their implications for S&P 500 share retirements and expected returns," Finance and Economics Discussion Series 1999-59, Board of Governors of the Federal Reserve System (U.S.).
    16. Huddart, Steven & Lang, Mark, 1996. "Employee stock option exercises an empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 5-43, February.
    17. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    18. Jennifer Carpenter, 1997. "The Exercise and Valuation of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-10, New York University, Leonard N. Stern School of Business-.
    19. Hall, Brian J. & Murphy, Kevin J., 2002. "Stock options for undiversified executives," Journal of Accounting and Economics, Elsevier, vol. 33(1), pages 3-42, February.
    20. Yermack, David, 1995. "Do corporations award CEO stock options effectively?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 237-269.
    21. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, vol. 56(5), pages 1747-1764, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Brown, Jeffrey R. & Liang, Nellie & Weisbenner, Scott, 2006. "401(k) matching contributions in company stock: Costs and benefits for firms and workers," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1315-1346, August.
    2. Peter Roosenboom & Tjalling van der Goot, 2006. "Broad-based employee stock options grants and IPO firms," Applied Economics, Taylor & Francis Journals, vol. 38(12), pages 1343-1351.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2001-57. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.