NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Trouble with Stock Options

Brian J. Hall, Kevin J. Murphy

NBER Working Paper No. 9784
Issued in June 2003
NBER Program(s):   CF   LS   PE

The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.

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Document Object Identifier (DOI): 10.3386/w9784

Published: Hall, Brian J. and Kevin J. Murphy. "The Trouble With Stock Options," Journal of Economic Perspectives, 2003, v17(3,Summer), 49-70.

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