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Market valuation and employee stock options

Ge Zhang
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Ge Zhang: University of New Orleans

No 2003-13, Working Papers from University of New Orleans, Department of Economics and Finance

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.

Keywords: Market valuation; Stock options (search for similar items in EconPapers)
JEL-codes: G12 G32 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-bec, nep-fin and nep-fmk
Date: 2004-01-27
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