Real Investment Implications of Employee Stock Option Exercises

Real Investment Implications of Employee Stock Option Exercises This paper examines a real cost of awarding employee stock options. Based on the observation that managers are extremely concerned about earnings‐per‐share dilution in equity related compensation, we predict and find that firms experiencing significant employee stock option (ESO) exercises shift resources away from real investments towards the repurchase of their own stocks. We further find weak evidence of a decline in subsequent firm performance (as measured by return on assets) for several years following the cut in discretionary investments as a result of stock option exercises, though this result is sensitive to the metric used to measure performance. Collectively, our findings indicate that ESO exercises potentially impose a real cost on the firm in terms of foregone investment opportunities. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Real Investment Implications of Employee Stock Option Exercises

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
University of Chicago on behalf of the Institute of Professional Accounting, 2002
ISSN
0021-8456
eISSN
1475-679X
D.O.I.
10.1111/1475-679X.00052
Publisher site
See Article on Publisher Site

Abstract

This paper examines a real cost of awarding employee stock options. Based on the observation that managers are extremely concerned about earnings‐per‐share dilution in equity related compensation, we predict and find that firms experiencing significant employee stock option (ESO) exercises shift resources away from real investments towards the repurchase of their own stocks. We further find weak evidence of a decline in subsequent firm performance (as measured by return on assets) for several years following the cut in discretionary investments as a result of stock option exercises, though this result is sensitive to the metric used to measure performance. Collectively, our findings indicate that ESO exercises potentially impose a real cost on the firm in terms of foregone investment opportunities.

Journal

Journal of Accounting ResearchWiley

Published: May 1, 2002

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