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Journal of Financial Economics Vol. 78 No. 2 2005

An empirical examination of the costs and benefits of executive stock options: Evidence from Japan

Hideaki Kiyoshi Kato1,2,3; Michael L. Lemmon4; Mi Luo4,5; James S. Schallheim4

1 Escola Brasileira de Economia e Finanças · 2 Kobe University · 3 Nagoya University · 4 University of Utah · 5 Villanova University

open access

Abstract

In May 1997, the Japanese Commercial Code was amended to allow firms to begin granting stock options as compensation to top management and employees. Nearly 350 firms adopted option-based compensation plans between 1997 and 2001. These options typically have five-year lives and are out-of-the-money by about 5% at the grant date. Firms exhibit abnormal stock returns of about 2% around the announcements of plan adoptions. We find improvements in operating performance and observe that dividend policy and volatility remain unchanged post-adoption. Our evidence suggests that well-designed incentive compensation plans are consistent with the creation of shareholder value.

DOI
10.1016/j.jfineco.2004.09.001
Volume
78
Issue
2
Pages
435-461
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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