Accounting, Governance, and Broad-Based Stock Option Grants

Abstract

We estimate the costs of broad-based stock option programs relative to cash compensation and restricted stock grants. Using detailed data on stock-option grants to middle managers, we rst compute the cost of option grants under the assumption that grants are driven solely by the dierence between their accounting and economic costs. Under this assumption, the median rm in our sample incurs $0.64 in real costs in order to increase reported pre-tax net income by $1. This cost is reduced, but is still quite substantial, if accounting considerations drive rms to grant stock options when grants of restricted stock would capture similar economic benets. Finally, we examine the possible sources of economic benets of broad-based option programs if observed grants are more protable than restricted stock grants. We nd that the choice of options over restricted stock is consistent with rms using equity grants to attract and retain