Do corporations award CEO stock options
e ectively?
David Yermack (1995)
ff
, Main Questions of the Article
The main question of the article:
Is it an e cient mechanism to provide stock options to CEOs in order to align
their interests with an interests of shareholders?
Speci cally, this paper examines the determinants of stock option grants and
how this mechanism aligns with the agency cost reduction theories.
The main aim is to determine if CEO stock options are e ective performance
incentives and nd the relationship between the compensation structure and
rm’s liquidity, tax status, or earnings management concerns.
fi fi ffi fi ff
, Motivation of the Author
The motivation stems from the speed growth in rewarding CEOs by stock options.
But at the same time, there was a lack of proof of their e cacy in the scienti c
literature.
Earlier research, such as Jensen and Murphy (1990), attempted to measure pay-
performance sensitivity. However, it did not include a comprehensive analysis across
di erent industries and periods.
Other studies had a signi cant drawbacks, such as small sample sizes, inconsistent
methodologies, or incomplete data.
Yermack covered these gaps by using a huge dataset from di erent industries and
utilizing a modi ed Tobit estimation model.
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e ectively?
David Yermack (1995)
ff
, Main Questions of the Article
The main question of the article:
Is it an e cient mechanism to provide stock options to CEOs in order to align
their interests with an interests of shareholders?
Speci cally, this paper examines the determinants of stock option grants and
how this mechanism aligns with the agency cost reduction theories.
The main aim is to determine if CEO stock options are e ective performance
incentives and nd the relationship between the compensation structure and
rm’s liquidity, tax status, or earnings management concerns.
fi fi ffi fi ff
, Motivation of the Author
The motivation stems from the speed growth in rewarding CEOs by stock options.
But at the same time, there was a lack of proof of their e cacy in the scienti c
literature.
Earlier research, such as Jensen and Murphy (1990), attempted to measure pay-
performance sensitivity. However, it did not include a comprehensive analysis across
di erent industries and periods.
Other studies had a signi cant drawbacks, such as small sample sizes, inconsistent
methodologies, or incomplete data.
Yermack covered these gaps by using a huge dataset from di erent industries and
utilizing a modi ed Tobit estimation model.
ff fi fi ffi ff fi
