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Incentives, Targeting, and Firm Performance: An Analysis of Non-executive Stock Options

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  • Yael V. Hochberg
  • Laura Lindsey

Abstract

We examine whether options granted to non-executive employees affect firm performance. Using new data on option programs, we explore the link between broad-based option programs, option portfolio implied incentives, and firm operating performance, utilizing an instrumental variables approach to identify causal effects. Firms whose employee option portfolios have higher implied incentives exhibit higher subsequent operating performance. Intuitively, the implied incentive-performance relation is concentrated in firms with fewer employees and in firms with higher growth opportunities. Additionally, the effect is concentrated in firms that grant options broadly to non-executive employees, consistent with theories of cooperation and mutual monitoring among co-workers. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Yael V. Hochberg & Laura Lindsey, 2010. "Incentives, Targeting, and Firm Performance: An Analysis of Non-executive Stock Options," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 4148-4186, November.
  • Handle: RePEc:oup:rfinst:v:23:y:2010:i:11:p:4148-4186
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    File URL: http://hdl.handle.net/10.1093/rfs/hhq093
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    Citations

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    Cited by:

    1. Jan Zabojnik, 2014. "Stock-based Compensation Plans and Employee Incentives," Working Papers 1325, Queen's University, Department of Economics.
    2. Ilona Babenko & Rik Sen, 2016. "Do Nonexecutive Employees Have Valuable Information? Evidence from Employee Stock Purchase Plans," Management Science, INFORMS, vol. 62(7), pages 1878-1898, July.
    3. repec:eee:joacli:v:38:y:2017:i:c:p:14-33 is not listed on IDEAS
    4. Nien-Chi Liu & Ming-Yuan Chen & Mei-Ling Wang, 2016. "The Effects of Non-Expensed Employee Stock Bonus on Firm Performance: Evidence from Taiwanese High-Tech Firms," British Journal of Industrial Relations, London School of Economics, vol. 54(1), pages 30-54, March.
    5. repec:bla:randje:v:48:y:2017:i:1:p:94-124 is not listed on IDEAS
    6. Chang, Xin & Fu, Kangkang & Low, Angie & Zhang, Wenrui, 2015. "Non-executive employee stock options and corporate innovation," Journal of Financial Economics, Elsevier, vol. 115(1), pages 168-188.
    7. Serdar Aldatmaz & Paige Ouimet & Edward D Van Wesep, 2014. "The Option To Quit: The Effect Of Employee Stock Options On Turnover," Working Papers 14-06, Center for Economic Studies, U.S. Census Bureau.
    8. Fang, Hongyan & Nofsinger, John R. & Quan, Juan, 2015. "The effects of employee stock option plans on operating performance in Chinese firms," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 141-159.
    9. Liu, Yi & Li, Xue & Lahiri, Sajal, 2016. "Determinants of privatization in China: The role of the presence of foreign firms," China Economic Review, Elsevier, vol. 41(C), pages 196-221.
    10. Masulis, Ronald W. & Wang, Cong & Xie, Fei, 2012. "Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 527-554.
    11. Olubunmi Faleye & Emery Trahan, 2011. "Labor-Friendly Corporate Practices: Is What is Good for Employees Good for Shareholders?," Journal of Business Ethics, Springer, vol. 101(1), pages 1-27, June.
    12. Call, Andrew C. & Kedia, Simi & Rajgopal, Shivaram, 2016. "Rank and file employees and the discovery of misreporting: The role of stock options," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 277-300.
    13. Joanne Oxley & Gurupdesh Pandher, 2016. "Equity-based incentives and collaboration in the modern multibusiness firm," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1379-1394, July.
    14. repec:eee:jfinec:v:127:y:2018:i:3:p:519-545 is not listed on IDEAS
    15. Yaping Shan, 2017. "Optimal contracts for research agents," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 94-124, March.
    16. repec:eee:jbfina:v:81:y:2017:i:c:p:81-104 is not listed on IDEAS
    17. Li, Xingli & Pukthuanthong, Kuntara & Glenn Walker, Marcus & Walker, Thomas John, 2016. "The determinants of IPO-related shareholder litigation: The role of CEO equity incentives and corporate governance," Journal of Financial Markets, Elsevier, vol. 31(C), pages 81-126.

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