The Value-Relevance of Stock Options

Abstract

Stock options have become an increasingly important component of executive compensation. One of the primary reasons firms grant stock options to their executives is to motivate them to increase the firm value. If the stock price increases, executives will be rewarded through the increase in the value of their options. Theoretically, the higher the stock price, the higher the value of those options and the wealthiest the executives will become. Granting stock options to di- rectors, however, may raise a question about its effectiveness since monitoring management is the primary reason of their appointment. Nonetheless, if the directors are also agents, whose interests are not necessarily aligned with those of the shareholders, the same arguments will apply to them. Consistent with these arguments, this study empiri- cally shows that the value of CEO stock options and the value of director stock options are positively associated with the firm value. These results suggest that besides earnings and book value of equity, the value of CEO stock options and the value of director stock options have value-relevance in explaining the firm value.