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Abstract
This paper examines determinants and consequences of the adoption of executive stock options (ESOs) for initial public offering (IPO) firms. IPO firms with substantial ownership dilution are predicted to adopt ESOs to align the interests of management and shareholders, and as a result, the adoption of ESOs is expected to lead to improved post-IPO operating performance. Using a sample of Japanese IPO firms between 2002 and 2007, I find that dilution of a CEO ownership can explain the adoption of ESOs after an IPO. I also find that ESOs lead to increased post-IPO operating performance.
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