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Article
Publication date: 17 July 2009

Kevin J. Sigler

The purpose of this paper is to discuss how executive stock options help in reducing agency costs in the firm and to address problems experienced by the firm when stock

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Abstract

Purpose

The purpose of this paper is to discuss how executive stock options help in reducing agency costs in the firm and to address problems experienced by the firm when stock options are used as incentives.

Design/methodology/approach

The paper initially discusses types of agency problems caused by company managers and then explains why stock options can reduce the problem of excessive risk aversion displayed by some managers. It then addresses the problems that may occur with the introduction of executive stock options by the firm and finally offers methods to reduce these problems.

Findings

The paper explains the methods available to reduce the problems caused by executive stock options such as indexing the stock options to the S&P 500 index and structuring the Board of Directors in a manner that helps ensure the stock options are used appropriately.

Originality/value

This paper is valuable to firms using executive stock options as incentives to managers. It outlines the problems stock options can help solve and the problems which may occur by their use. In addition, the ways to reduce the problems produced by executive stock options in the firm are discussed.

Details

Management Research News, vol. 32 no. 8
Type: Research Article
ISSN: 0140-9174

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Article
Publication date: 1 April 2004

Jeffrey A. Williamson and Brian H. Kleiner

Stock options, once exclusive to executives, are now becoming more broad based to include middle management and non‐management employees. In 2000 an estimated 10 million…

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3196

Abstract

Stock options, once exclusive to executives, are now becoming more broad based to include middle management and non‐management employees. In 2000 an estimated 10 million workers’ compensation packages contained stock options. In today’s competitive environment, firms are looking for ways to attract and retain workers, reward outstanding performance, and return value to shareholders while minimising costs. Stock options provide such a vehicle. The paradox is that while stock options are intended to tie pay to performance, many employees lack the knowledge of how the options actually work. Employees need to be educated as to the different types of plans and how it affects their total compensation. A contentious debate exists over whether firms actually benefit from stock options plans and the reasons why some prosper while others fail. Researchers and experts agree that the success of a stock option plan lies largely in how effective firms are at managing the plan and communicating it to its employees.

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Management Research News, vol. 27 no. 4/5
Type: Research Article
ISSN: 0140-9174

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Article
Publication date: 1 May 2006

T.T. Selvarajan, Nagarajan Ramamoorthy, Patrick Flood and Peter Rowley

The objective of this research is to present a causal model of the influence of stock options on psychological contract and employee attitudes, and report results of an…

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2156

Abstract

Purpose

The objective of this research is to present a causal model of the influence of stock options on psychological contract and employee attitudes, and report results of an initial empirical examination of this model.

Design/methodology/approach

To test the model, data were collected using a survey methodology from 98 employees in a large financial services firm. Multiple‐regression equations were used to derive the path coefficients.

Findings

The psychological contract variable of met expectations mediated the relationships between stock options and tenure intent and organizational commitment thus providing support for the intrinsic value model. Equity perceptions mediated the relationship between stocks exercised and met expectations. Equity perceptions, however, did not mediate the relationship between stock options and employee attitudes. Similarly, stock earnings also had a direct effect on external career intent indicating that employees who had exercised their stock options were looking for outside career opportunities contrary to our hypothesis.

Research limitations/implications

Future studies should attempt to reconcile the intrinsic versus extrinsic value stock options may have on employee attitudes. These results should be considered tentative and interpreted with caution due to the cross‐sectional nature of data. The support for the intrinsic model suggests that organizations that use stock options may expect positive attitudes from their employees.

Originality/value

This is believed to be the first study that attempts to develop and test a causal model.

Details

International Journal of Sociology and Social Policy, vol. 26 no. 5/6
Type: Research Article
ISSN: 0144-333X

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Article
Publication date: 17 September 2021

Mincheol Woo and Meong Ae Kim

Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies…

Abstract

Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to predict future returns of stocks using informed traders' behavior in the options market. In this study, we examine whether the trading volume ratios of single stock options have the predictive power for future returns of the underlying stock. By analyzing the stock price responses to the “preliminary announcement of performance” of 36 underlying stocks on the Korea Exchange from November 2014 to March 2021 and the trading volume of options written on those stocks, we investigate the relation between the option ratios, which are the call option volume to put option volume ratio (C/P ratio) and the option volume to stock volume ratio (O/S ratio), and the future returns of the underlying stock. We also examine which ratio is better in predicting the future returns. The authors found that both option ratios showed the statistically significant predictability about future returns of the underlying stock and that the return predictability of the O/S ratio is more robust than that of the C/P ratio. This study shows that indicators generated in the options market can be used to predict future underlying stock returns. Further, the findings of this study contributed to a dearth of literature pertaining to single stock options. The results suggest that the single stock options market is efficient and influences the price discovery in the stock market.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1229-988X

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Content available
Article
Publication date: 16 July 2021

Qi Shi, Shufang Xiao, Kaiwen Chang and Jiaying Wu

With the accelerated technological advancement, innovation has become a critical factor, which affects the core competitiveness of a company. However, studies about the…

Abstract

Purpose

With the accelerated technological advancement, innovation has become a critical factor, which affects the core competitiveness of a company. However, studies about the relationship between internal stock option mechanisms and innovation productivity remain limited. Therefore, this paper aims to examine the impact of stock options and their elements design on innovation output from an internal mechanism perspective.

Design/methodology/approach

Using a sample of 302 stock option incentive plans announced and implemented between 2006 and 2016, this study uses the propensity score matching and difference-in-difference model to find out whether the implementation of stock options improves the innovation outputs of enterprises.

Findings

Based on the statistical analysis, it is concluded that: stock options can stimulate corporate innovation; a stock option may drive innovation outputs through two ways, performance-based incentives and risk-taking incentives, with the latter one playing a more dominant role and the risk-taking incentives of stock options, could be optimised when the non-executives granting proportion is larger, the granting range is limited, the incentive period is longer, the exercisable proportion is increasing, the price-to-strike ratio is lower and relatively loose performance assessment criteria are applied.

Originality/value

The conclusion reached in the study may provide valuable information to listed firms in designing and implementing the stock option plans.

Details

Nankai Business Review International, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2040-8749

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Book part
Publication date: 7 October 2019

Natalie Tatiana Churyk, Shaokun (Carol) Yu and Brian Rick

This exercise exposes students to the accounting for stock option modifications and option service and performance conditions, requiring research in the Financial…

Abstract

This exercise exposes students to the accounting for stock option modifications and option service and performance conditions, requiring research in the Financial Accounting Standards Board (FASB) Accounting Standards Codification and the use of the Black-Scholes option pricing model.

Students identify and apply accounting standards to account for stock option plans, stock option modifications, acquired stock option plans, and service and performance conditions that relate to stock option plans. Indirect student feedback suggests that students view the exercise as valuable. Comments include that the exercise reinforces and expands their knowledge of real-world stock compensation plans. Direct assessment data using grading rubrics finds that most students meet instructor expectations.

The exercise enhances critical thinking skills, increases professional research practice, and improves written skills. It introduces students to common real-world events and reinforces their learning related to stock compensation.

Details

Advances in Accounting Education: Teaching and Curriculum Innovations
Type: Book
ISBN: 978-1-78973-394-5

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Article
Publication date: 11 March 2021

Bei Chen and Quan Gan

This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.

Abstract

Purpose

This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.

Design/methodology/approach

This paper proposes a gambling activity measure by jointly considering open interest and moneyness of out-of-the-money (OTM) individual equity call options.

Findings

The new measure, CallMoney, captures excessive optimism during the dot-com bubble, the oil price bubble and the pre-GFC stock market bubble. CallMoney robustly and negatively predicts both OTM and at-the-money call option returns cross-sectionally. The option return predictability of CallMoney is stronger when stock price is further from its 52-weeks high, capital gains overhang is lower, and when information uncertainty of the underlying stock is higher. CallMoney also robustly and negatively predicts cross-sectional stock returns.

Originality/value

The gambling measure has the advantages of being economically intuitive, model-free, easy to measure. The measure performs more robustly than existing lottery measures with respect to option and stock return predictability and more reliably captures the overpricing of options and stocks. The work helps understanding the gambling related anomalies in equity option returns and stock returns.

Details

Review of Behavioral Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1940-5979

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Book part
Publication date: 19 May 2010

Theresa F. Henry

In late 2008, a crisis of unprecedented proportion unfolded on Wall Street that called for the government bailout of institutions. Although the crisis wreaked havoc on the…

Abstract

In late 2008, a crisis of unprecedented proportion unfolded on Wall Street that called for the government bailout of institutions. Although the crisis wreaked havoc on the lives of firm stakeholders and taxpayers, many of the executives of these rescued firms received bonus compensation as the year closed, which called into question the relationship between pay and performance. Equity compensation is viewed by many as the answer to the principal–agent dilemma. By giving an executive stock in the firm, as an owner, his interests will now be aligned with those of shareholders, and the executive will work to enhance firm performance. Equity compensation was on the rise during the 1990s when stock options became the largest component of executives’ compensation packages [Murphy, K. J. (1999). Executive compensation. Handbook of Labor Economics, 3, 2485–2563]. During the first decade of the new millennium, usage of restricted stock in compensation plans contributed to the executives’ total package. Whatever the form, equity compensation should induce managers to make decisions for the betterment of the firm.

Empirical evidence, however, has contradicted this ideal notion that mangers who are partial owners of the firm work to maximize firm value. Rather, managerial power in the form of earnings management and manipulation of insider information come to the forefront as a means by which executives can maximize the equity portion of their compensation packages. The Sarbanes–Oxley Act of 2002 as well as new accounting rules set forth by the Financial Accounting Standards Board may help to remedy some of the corporate ills that have surfaced in the past. This will not be possible, however, without compliance and increased corporate governance on the part of firms and their executives. Compensation committees must take great care in creating a compensation package that incites the executive to not only act in the best interest of his firm but also consider the welfare of the common good in his actions.

Details

Ethics, Equity, and Regulation
Type: Book
ISBN: 978-1-84950-729-5

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Book part
Publication date: 4 December 2012

Stephen L. Liedtka and Nandkumar Nayar

The current and widespread view in option trading is that early exercise of call options is suboptimal unless there are large dividend payments on the underlying stock

Abstract

The current and widespread view in option trading is that early exercise of call options is suboptimal unless there are large dividend payments on the underlying stock (e.g., Finucane, 1997; Hull, J. C. (2008). Options, futures and other derivatives (7th ed.). Upper Saddle River, NJ: Prentice Hall; Poteshman & Serbin (2003)). Our study substantially refines this view by demonstrating that U.S. tax rules governing capital gain holding periods can create incentives for early exercise under certain conditions. Hence, this study adds to the factors that investors likely consider when making option exercise decisions. We further note that recent research documents early exercises in the absence of large dividends, and refers to these option exercises as “clearly irrational.” Predictions of early exercise from our tax-based model are consistent with the observed patterns of early exercise, suggesting that the criteria for denoting an option exercise as “irrational” should be refined to incorporate capital gain holding periods.

Details

Advances in Taxation
Type: Book
ISBN: 978-1-78052-593-8

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Book part
Publication date: 30 April 2008

Rebecca Abraham and Charles W. Harrington

We propose a novel method of forecasting equity option spreads using the degree of multiple listing as a proxy for expectations of future spreads. Spreads are a…

Abstract

We propose a novel method of forecasting equity option spreads using the degree of multiple listing as a proxy for expectations of future spreads. Spreads are a transactions fee for traders. To determine the future spreads on options being considered for purchase, traders must take current market trends affecting spreads into account. One such trend is the continued decline in spreads due to the multiple listing of options. Options listed on 4–6 exchanges compete more intensely than those listed on fewer exchanges, so that they may be expected to experience greater future declines in spreads. This study identifies the listing dates and number of listed exchanges for options listed on up to six exchanges as of May 2005. Listing criteria for multiple listing are defined with short- and long-term volumes, market capitalization, net income, and total assets being significant determinants of multiple listing. Short- and long-term volumes were found to have no explanatory power for multiple listing. Ranges of listing criteria are specified so that traders may locate the options of their choice.

Details

Advances in Business and Management Forecasting
Type: Book
ISBN: 978-0-85724-787-2

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