Broad-based stock options program and firm productivity
Lin, Yu Peng
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Do stock option programs, especially the one for rank-and-file employees (Broad-based stock options program), improve firm productivity? What is(are) the possible determinant(s) of the adoption decision? In this paper, we attempt to examine the impact of broad-based stock options program by three methods - Fixed effect, Difference-in-Differences, and more generally, Endogenous switching model. The reasons are two fold. First, the program impact, if any, may be due to some factors other than the program. Difference-in-Differences estimation is one way of tackling this issue. Second, while a program dummy variable is often utilized to capture the impact, such method does not allow full interaction between the program and other exogenous variables. Generally, one can address this concern by developing an endogenous switching model. In sum, in this study, first, we apply the three methods to a unique data set containing exact start years of broad-based and executive stock option programs to examine the program impact. The Hausman endogeneity test reveals no evidence of endogeneity. Moreover, the panel nature of the data allows adjustment, and testing, for two forms of sample selection bias. We document that broad-based stock options program has positive impact on firm productivity. Nonetheless, we cannot find conclusive evidence of the selection bias. Second, we agree with the literature that promoting mutual monitoring and selection/retention as the primary determinants of the adoption decision.