Why do some firms give stock options to all employees?: An empirical examination of alternative theories |
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| Institution: | 1. Shanghai Advanced Institute of Finance, Shanghai Jiatong University, China;2. The Haas School of Business, University of California, Berkeley, CA 94720, United States;3. The Robert H. Smith School of Business, University of Maryland, College Park, MD 20742, United States;4. African Economic Research Consortium (www.aercafrica.org), Nairobi, Kenya;1. Pompea College of Business, University of New Haven, USA;2. School of Entrepreneurship and Economics, ShanghaiTech University, China;3. Center for Quantitative Economics of Jilin University, China;4. International College, Renmin University of China, China |
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| Abstract: | Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and employee retention. We gather data from three sources on firms’ stock option grants to middle managers. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. We also conduct a cross-sectional regression analysis of firms’ option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data. |
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