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Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories

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  • Paul Oyer
  • Scott Schaefer

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 helping firms retain employees. We gather data on firms' stock option grants to middle managers from three distinct sources, and use two methods to assess which theories appear to explain observed granting behavior. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. Second, we 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10222.

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Date of creation: Jan 2004
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Publication status: published as Oyer, Paul & Schaefer, Scott, 2005. "Why do some firms give stock options to all employees?: An empirical examination of alternative theories," Journal of Financial Economics, Elsevier, vol. 76(1), pages 99-133, April.
Handle: RePEc:nbr:nberwo:10222

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