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Market valuation and employee stock options

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Author Info
Zhang, Ge (University of New Orleans)
Abstract

This paper investigates a market-valuation-based hypothesis for employee stock options (ESOs). It examines how market valuation has affected the decision to grant ESOs, the amount of options granted, and the distribution of options among executives and rankand- file employees. I find strong empirical evidence that firms with high market valuation and high probability of future overvaluation are more likely to adopt ESOs and grant more options to their employees. Furthermore, when top executives perceive that the current market valuation is high, they grant a smaller portion of options to themselves relative to rank-and-file employees. All these results are consistent with the market-valuation rationale for ESOs, which argues that firms use ESOs as a method to sell overvalued equity.

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Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2003-13.

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Length: 43 pages
Date of creation: 27 Jan 2004
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Handle: RePEc:uno:wpaper:2003-13

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Keywords: Market valuation Stock options

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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