Rev Quant Finan Acc (2006) 26: 249–274
Do executive stock option grants have value implications
for ﬁrm performance?
Swee-Sum Lam · Bey-Fen Chng*
Springer Science + Business Media, Inc. 2006
Abstract Consistent with predictions of agency theory, we ﬁnd direct evidence that exec-
utive stock option grants have value implications for ﬁrm performance. This inference is
drawn from evaluation of various motivations for the use of such grants in executive com-
pensation: value enhancement, risk taking, tax beneﬁt, signaling and cash conservation. We
ﬁnd consistent evidence for the value enhancement motivation to reduce agency costs. As
well, they signal for positive price sensitive information. Our results reject the tax beneﬁt and
cash conservation motivations. This ﬁnding is robust after controlling for the endogenous
character of executive stock option grants and other equity-based grants.
Keywords Executive stock option grants
JEL Classiﬁcation G32
In the last decade of the twentieth century, executive stock option (XSO) grants have emerged
as the single largest component of executive compensation in the U.S. (Hall and Liebman,
1998; Murphy, 1999). More recent statistics from the Standard and Poor’s (S&P) Execu-
Comp database support this trend: the value of XSOs accounted for 54 percent of the total
compensation for the S&P 500 top executives in 2001, an increase from 34 percent in 1992.
S.-S. Lam (
Department of Finance and Accounting,
The NUS Business School, National University of Singapore, Singapore 117592
Tel: (65) 6516 3037
Fax: (65) 6779 1296.
ExxonMobil Asia Paciﬁc Pte Ltd