Agency Costs and Management Contracting: Granting Executive Stock Options as a Strategic Compensation Practice?

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

Posted: 10 Oct 2006

See all articles by Swee Sum Lam

Swee Sum Lam

National University of Singapore - NUS Business School

Yew Kee Ho

National University of Singapore (NUS) - Department of Accounting

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 that 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 characteristics, cash compensation, incentives

JEL Classification: M52, J33, J38

Suggested Citation

Lam, Swee Sum and Ho, Yew-Kee, Agency Costs and Management Contracting: Granting Executive Stock Options as a Strategic Compensation Practice?. International Journal of Human Resources Development and Management, Vol. 6, No. 1, pp. 22-47, 2006, Available at SSRN: https://ssrn.com/abstract=934487

Swee Sum Lam (Contact Author)

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6516 3037 (Phone)
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HOME PAGE: http://www.bschool.nus.edu

Yew-Kee Ho

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore

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