Working Paper: NBER ID: w9784
Authors: Brian J. Hall; Kevin J. Murphy
Abstract: The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.
Keywords: No keywords provided
JEL Codes: J0; J3; G3; L0; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock options (G13) | executive motivation (M12) |
| stock options (G13) | risk-taking behavior (D91) |
| risk-taking behavior (D91) | negative corporate outcomes (D62) |
| perceived cost of stock options (M52) | managerial decisions (M51) |
| actual cost of stock options (G13) | managerial decisions (M51) |
| accounting practices (M41) | managerial decisions (M51) |
| tax laws (K34) | managerial decisions (M51) |