Stock Options and Long Term IPO Performance

A paper by Pukthuanthong and Walker that was presented at the European FMA Meetings examines the use of options in pay packages of IPO firms. It finds that “new public companies that have high use of stock options outperform those that have low use of stock options from the lock-up period until three years after the issue.” The authors find similar results when looking at operating performance. The authors also document that firms with higher use of options (even after controlling for better performance) experience lower managerial turnover. Now there is somewhat of a problem with endogenity (i.e. Management has the ability to select the use of options and will not if the future looks bleak), but that said, this is an important paper as it reminds us all that options are useful and can lead to higher shareholder returns. That is something we may be tempted to downplay after the problems at Enron, Worldcom etc. [ Annotation]

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