Title: Agency costs and management contracting: granting executive stock options as a strategic compensation practice?

Authors: Swee-Sum Lam, Yew-Kee Ho

Addresses: Department of Finance and Accounting, The NUS Business School, National University of Singapore, 1 Business Link, 117592 Singapore. ' Department of Finance and Accounting, The NUS Business School, National University of Singapore, 1 Business Link, 117592 Singapore

Abstract: This is an exploratory study on the characteristics and performance of firms that choose to grant executive stock options as a strategic compensation practice. According to the push theory of employee ownership, stock options are granted to push employees to create superior financial performance. We find that firms which grant executive stock options offer persistent abnormal firm performance. Firms that grant stock options in lieu of cash compensation do not perform differently in the long run from those that grant stock options as incentives. This finding is consistent with the proposition that the motivation for the use of executive stock options is endogenously determined for any firm given its investment opportunities and technology, risk characteristics and growth options.

Keywords: agency costs; management contracting; executive stock options; firm performance; cash compensation; incentives; strategic compensation.

DOI: 10.1504/IJHRDM.2006.009747

International Journal of Human Resources Development and Management, 2006 Vol.6 No.1, pp.22 - 47

Available online: 09 May 2006 *

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