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The Trouble with Stock Options

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Author Info
Brian J. Hall
Kevin J. Murphy
Abstract

The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9784.

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Date of creation: Jun 2003
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Handle: RePEc:nbr:nberwo:9784

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Find related papers by JEL classification:
J0 - Labor and Demographic Economics - - General
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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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.:
  1. Espahbodi, Hassan & Strock, Elizabeth & Tehranian, Hassan, 1991. "Impact on equity prices of pronouncements related to nonpension postretirement benefits," Journal of Accounting and Economics, Elsevier, vol. 14(4), pages 323-346, December. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," NBER Working Papers 9813, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Aboody, David, 1996. "Market valuation of employee stock options," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 357-391, October. [Downloadable!] (restricted)
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This page was last updated on 2009-11-13.

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