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Why New Ventures Grant Employee-Stock-Options

Author

Listed:
  • Elli Kraizberg

    (Bar-Ilan University)

  • Vassilios N. Gargalas

    (Western Connecticut State University)

Abstract

As of 1998, nine percent of the shares of all firms in the US, primarily young and small ones, have been owned, essentially by about 17 million employees. The recent trend of new ventures to grant company-wide stock options plans is an alignment of the interests of management, shareholders, and non-managerial employees. This paper empirically explores the hypothesis that company-wide stock options plans primarily serve the interests of the firm?s management. This is true, whether or not, management owns a stake in the firm?s equity, though the degree of his or her motivation varies depending on the size of his/her stake in the firm?s equity. The paper unambiguously disproves the view that grants of employee stock options are meant to ease cash flow strains for small young firms.

Suggested Citation

  • Elli Kraizberg & Vassilios N. Gargalas, 2002. "Why New Ventures Grant Employee-Stock-Options," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(2), pages 83-103, Summer.
  • Handle: RePEc:pep:journl:v:7:y:2002:i:2:p:83-103
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    References listed on IDEAS

    as
    1. Cuny, Charles J. & Jorion, Philippe, 1995. "Valuing executive stock options with endogenous departure," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 193-205, September.
    2. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
    3. Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 409-425, December.
    4. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
    5. Hemmer, Thomas, 1993. "Risk-free incentive contracts : Eliminating agency cost using option-based compensation schemes," Journal of Accounting and Economics, Elsevier, vol. 16(4), pages 447-473, October.
    6. Ben-Ner, Avner & Jun, Byoung, 1996. "Employee Buyout in a Bargaining Game with Asymmetric Information," American Economic Review, American Economic Association, vol. 86(3), pages 502-523, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Venture Capital; New Venture; Startup; Stock Options; Compensation;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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