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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.

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.

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.

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.

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.

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.

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.

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.

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.

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

This study aims to elaborate on how firms manage research and development (R&D) activities by examining the relationship between ownership concentration and corporate R&D investment, as well as the moderating role of stock options in this relationship.

The study sample comprised 354 Chinese listed firms from 2011 to 2019, and the Tobit model and the system GMM test are used to check robustness.

The results reveal that ownership concentration and R&D investment have an inverted U-shaped relationship. In the presence of stock options, this inverted U-shaped relationship is significantly weaker.

The results have important managerial implications for firms that aim to grant stock options and improve the impact of ownership concentration on R&D investment strategies.

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

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

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.

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.

The purpose of this paper is to investigate the contrasting moderating effect of a firm’s exploration on the relationship between the two types of long-term incentives (stock options/stock ownership) for the chief executive officers and a firm’s long-term performance. Even though the two types of incentives are designed to improve long-term performance, the degrees of impact on long-term performance differ. Based on behavioral agency theory, this study theoretically and empirically examines the role of a firm’s exploration on the above relationship.

This study used three archival sources to obtain data on stock options, stock ownership, patents and exploration, financial measures, and others. Based on a sample of 1,963 firms in various industries from 1995 to 2006, this study tested the moderating effect of a firm’s exploration on the relationship between stock options/ownership and a firm’s performance.

This study reveals the contrasting moderating effect of a firm’s exploration on the relationship between stock options/ownership and a firm’s long-term performance: a positive moderating effect on the relationship between stock options and performance and a negative moderating effect on the relationship between stock ownership and performance. In addition, empirical evidence was added on the inverted U-shaped relationship between stock ownership and a firm’s long-term performance.

There is little research on a firm’s internal characteristics that strengthen or weaken the effects of stock options and stock ownership on firm performance. This study demonstrates the differential moderating effects of exploration on the relationship between stock options/stock ownership and long-term performance. Such effects of exploration come from the different risk features of stock options and stock ownership. The key implication is that stock options could be more effective than stock ownership to enhance a firm’s long-term performance when a firm has a strong exploration orientation.

The purpose of this paper is to examine the effect of short-sale restrictions (SSR) with particular emphasis on their impact on the liquidity and informed trading in the stock and option markets.

Using a panel regression with controls for volatility, VIX and matched stocks, this study examines the effect of the short-sale ban (SSB) on stock and option liquidity, expressed in terms of spread and volume. In addition, the PIN and option information share (OIS) measures have been used to analyze its impact on informed trading in those related markets.

The results suggest that the SSB leads to a significant reduction in the liquidity of the affected stocks and their options. However, no significant change in the trader composition can be detected. This result is consistent to the short-prohibition effect predicted by Diamond and Verrecchia (1987).

Due to the sizeable data required to estimate the PIN and OIS measures, only a select sample of optionable stocks has been examined.

This study offers both academics and policy makers some useful insights into the effect of SSR on trading activities in both stock and option markets. From a policy perspective, it clearly demonstrates that regulatory changes targeting a specific market also affect other related markets via the arbitrage link between them.

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.

The authors study stock and option grants around abrupt performance declines for continuing CEOs and find that firms facing abrupt financial declines grant more options than stock, while firms facing operational decline grant more stock than options. Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover. The paper aims to discuss these issues.

To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing.

Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover.

Several studies examine the relationship between poor performance and compensation of newly appointed CEOs. But firms regularly employ retention or incentive plans when experiencing distress to prevent critical employees from leaving when they are most needed (Goyal and Wang, 2017). Employee turnover results in a loss of continuity coupled with high search and training costs for replacement personnel. Beneish et al. (2017) find that 57 percent of CEOs associated with intentional misreporting retain their jobs, implying the costs of removing CEOs is high, especially if the incumbent CEO has a strong track record relative to industry peers prior to the period before the misreporting begins. The board fires the CEO if future firm value under the CEO is expected to be lower than under the best alternative CEO less adjustment costs (e.g. search costs, severance pay).

This paper aims to analyze the valuation of stock options from the perspective of an employee exhibiting preferences as described by cumulative prospect theory (CPT). In addition, it elaborates on their incentives effect and some implications in terms of design aspects.

The paper draws on the CPT framework to derive a continuous time model of the stock option subjective value using the certainty equivalence principle. Numerical simulations are used in order to analyze the subjective value sensitivity with respect to preferences‐related parameters and to investigate the incentives effect.

Consistent with a growing body of empirical and experimental studies, the model predicts that the employee may overestimate the value of his options in‐excess of their risk‐neutral value. Moreover, for typical setting of preferences parameters around the experimental estimates, and assuming the company is allowed to adjust existing compensation when making new stock option grants, the model predicts that incentives are maximized for strike prices set around the stock price at inception. This finding is consistent with companies’ actual compensation practices. Finally, the model predicts that an executive who is subject to probability weighting may be more prompted than a risk‐neutral executive to act in order to increase the firm's assets volatility.

This research proposes an alternative theoretical framework for the analysis of pay‐to‐performance sensitivity of equity‐based compensation that takes into account a number of prominent patterns of employee behavior that expected utility theory cannot explain. It contributes to recent empirical and theoretical researches that have advanced CPT framework as a promising candidate for the analysis of equity‐based compensation contracts.