An analysis of the market response to announcements of broad-based stock option plans and an analysis of the effects of broad-based plans on firm performance, employee behavior and employee retention

This dissertation assesses the impact of broad-based employee stock option plans on corporate performance. The study takes two approaches. Section one assesses the market response to broad-based plans by estimating abnormal market returns at the plan announcement date.; Using an event study methodology, section one identifies significantly negative, cumulative abnormal industry-adjusted returns of −1.34% for fifty two announcements over a four-day event period. Alternative abnormal return estimation models do not support the finding.; Section two examines three broad-based grants totaling 307,000 individual employee grants that were awarded by a Fortune 100 firm to all of its full-time employees in twenty five countries. Section two identifies the determinants of employee exercise behavior and estimates the association of stock options with motivation, performance, and retention.; Consistent with prior research, the study finds that employees exercise options quite early in the options' lives. Exercise activity is directly associated with stock price movements immediately prior to exercise. Exercise activity also increases when stock prices exceed prior annual highs and immediately following vesting dates.; Using a cross-sectional least squares regression model, the study finds that employee age, grade, performance, tenure with the company and host country income levels are directly associated with option age at exercise. Option age varies significantly across countries.; Using a cross-sectional logistic regression model, the study finds that the intrinsic value of stock options is inversely related to voluntary employee turnover whereas vesting is directly associated with the likelihood of voluntary turnover.; This study contributes to the stock option literature by extending broad-based stock option research to international operations. Using employee-specific data, it finds that employee exercise behavior varies by demographic and job-related factors. It also demonstrates that options may delay voluntary turnover during vesting periods.; These findings may assist firms in the design of broad-based plans by providing a framework for determining the influence of employee characteristics on exercise behavior. This framework may aid in determining option distribution and vesting schedules and in designing employee stock option education programs.