Empirical Analysis of a Stock Option

Abstract

I empirically analyze the characteristics of firms that introduce stock options and the introduction’s effects on the performances of Japanese firms. First, I compute the value of the stock options the firms introduced using two methods, the Black–Scholes’ option price valuation model and the binomial, or tree, model. Second, I examine whether firm profitability improved after the introduction of the stock option. The result shows that the stock option values had no positive effects on either ROA or ROE in both the manufacturing and non-manufacturing industries. For the manufacturing industries, where the dependent variable is ROA, stock option values show a statistically significant negative coefficient, suggesting that the introduction of a stock option would not improve firm profitability. Third, I examine whether the introduction of a stock option induces risk-taking firm behaviors. I use financial leverage, capital investment, and research and development (R&D) activity (for the manufacturing industry only) as risk-taking measurers. The empirical analyses of the relationship between stock options and risk-taking firm behavior show negative effects on financial leverage as well as positive effects on R&D activities. Therefore, the general hypothesis that the introduction of a stock option promotes risk-taking firm activities is not supported empirically.