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The Effect of Executive Stock Option Plans on Stockholders and Bondholders
Author(s) -
DeFUSCO RICHARD A.,
JOHNSON ROBERT R.,
ZORN THOMAS S.
Publication year - 1990
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1990.tb03707.x
Subject(s) - shareholder , non qualified stock option , stock (firearms) , restricted stock , stock dilution , business , stock options , financial economics , economics , stock market , econometrics , finance , corporate governance , mechanical engineering , paleontology , horse , engineering , biology
Executive stock option plans have asymmetric payoffs that could induce managers to take on more risk. Evidence from traded call options and stock return data supports this notion. Implicit share price variance, computed from the Black‐Scholes option pricing model, and stock return variance increase after the approval of an executive stock option plan. The event is accompanied by a significant positive stock and a negative bond market reaction. This evidence is consistent with the notion that executive stock options may induce a wealth transfer from bondholders to stockholders.