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Real Investment Implications of Employee Stock Option Exercises
Author(s) -
Bens Daniel A.,
Nagar Venky,
Wong M. H. Franco
Publication year - 2002
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00052
Subject(s) - equity (law) , stock (firearms) , business , stock options , earnings , restricted stock , compensation of employees , non qualified stock option , earnings per share , finance , economics , monetary economics , compensation (psychology) , stock market , mechanical engineering , political science , law , engineering , psychology , paleontology , horse , psychoanalysis , biology
This paper examines a real cost of awarding employee stock options. Based on the observation that managers are extremely concerned about earnings‐per‐share dilution in equity related compensation, we predict and find that firms experiencing significant employee stock option (ESO) exercises shift resources away from real investments towards the repurchase of their own stocks. We further find weak evidence of a decline in subsequent firm performance (as measured by return on assets) for several years following the cut in discretionary investments as a result of stock option exercises, though this result is sensitive to the metric used to measure performance. Collectively, our findings indicate that ESO exercises potentially impose a real cost on the firm in terms of foregone investment opportunities.