Abstract
This paper examines the use of stock options by Australian IPOs. Stock options in this setting exhibit heterogeneity of ‘in the moneyness’ attributes. We can therefore identify incentive ‘out of the money’ options and reward ‘at or in the money’ options and study their usage. The setting also features options granted to employees (CEO, executives, non-executive directors, and managers) and external parties (e.g., underwriters, lenders, seed capitalists, and promoters). We examine the motives for granting stock options with different ‘in the moneyness’ attributes to employees and external parties, as well as the performance outcomes. Our results suggest ‘in the moneyness’ attributes of options vary according to uncertainties about growth options, general operating risks, and/or agency risks relating to the use of IPO proceeds; however, these relations do not translate into robust links from the option grants to future performance.
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