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Accounting, Governance, and Broad-Based Stock Option Grants

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  • Oyer, Paul

    (Stanford U)

  • Schaefer, Scott

    (Northwestern U)

Abstract

We estimate the costs of broad-based stock option programs relative to cash compensation and restricted stock grants. Using detailed data on stock-option grants to middle managers, we first compute the cost of option grants under the assumption that grants are driven solely by the difference between their accounting and economic costs. Under this assumption, the median firm in our sample incurs $0.64 in real costs in order to increase reported pre-tax net income by $1. This cost is reduced, but is still quite substantial, if accounting considerations drive firms to grant stock options when grants of restricted stock would capture similar economic benefits. Finally, we examine the possible sources of economic benefits of broad-based option programs if observed grants are more profitable than restricted stock grants. We find that the choice of options over restricted stock is consistent with firms using equity grants to attract and retain employees, but not as a means of conserving cash.

Suggested Citation

  • Oyer, Paul & Schaefer, Scott, 2005. "Accounting, Governance, and Broad-Based Stock Option Grants," Research Papers 1821r1, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:1821r1
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    References listed on IDEAS

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    Cited by:

    1. Kevin F. Hallock & Craig A. Olson, 2010. "New Data for Answering Old Questions Regarding Employee Stock Options," NBER Chapters, in: Labor in the New Economy, pages 149-180, National Bureau of Economic Research, Inc.

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