Is the Issuing of Executive Stock Options a ‘Positive Signal' for the Market Value of a Firm?

Abstract

Executive Stock Options are believed to provide an incentive for superior management performance, a key for increasing shareholder value. In this paper it is examined whether stock options are associated with positive or negative shareholder returns in the short run in the Greek market by examining evidence from 35 major companies listed on the Athens Stock Exchange during the years 2006-2007 which was the most successful period of the Greek economy since the early 1980s. The empirical results reject the hypothesis that stock options provide positive market returns in the long run. The study also finds that the effect of stock options is increasingly negative for the company market value in the short run up to twelve months. These findings indicate that the issue of executive stock options should be of a closer focus by regulators, shareholders and probably tax authorities, because they combine significant tax benefits to managers whilst leading to high negative effect to shareholder value.