اختیارات سهام کارمندان به عنوان سند

Previous studies ignore the fact that employee stock options are warrants because these options have been an insignificant component of firms’ capital structures. I show that this assumption is no longer correct. For example, for more than 36% of my sample firms, employee stock options represent a more significant claim on firm value than the firm’s debt and preferred stock combined. Moreover, in contrast to the suggestions of previous research, I show that employee stock options are a significant claim on firms throughout the economy, including larger firms, older firms, and firms in “Old Economy” industries. Finally, I show that the presumption in prior studies that employee stock options are not warrants causes a potential misunderstanding of the risk-shifting interests of securityholders and biases the analysis of capital structure issues.

Employee stock options are issued by the employees’ firm and consequently are analogous to warrants. Previous studies ignore the warrant characteristic of these options because of the implicit or explicit assumption that these options are an insignificant component of firms’ capital structures. Murphy (1985), for example, notes that dilution ratios (i.e., the ratio of employee stock options to common shares outstanding) are usually less than 1% or 2%. Ohlson (2000) argues (p. 11) that dilutive securities such as employee stock options are “… common but typically not material, with the possible exception of compensation options within certain industries (especially within the so-called “New” economy).” I show that this assumption is no longer correct. In particular, I examine a hand-collected sample of 1821 firms with employee (i.e., executive and non-executive) stock option data available as of their 1999 fiscal year-end and make three primary contributions to the literature. First, I report that employee stock option claims are now economically significant for many firms throughout the economy, including larger firms, older firms, and firms in “Old Economy” industries. The average dilution ratio for my sample is nearly 12%, for example, and it is more than 13% for my sample firms in the Wholesale trade industry. Moreover, in contrast to the suggestions of previous research (e.g., Core and Guay (2001a), who examine an earlier sample period), I find an insignificant relation between a firm’s dilution ratio and factors such as the firm’s growth opportunities, period-of-listing, and cash constraint, ceteris paribus. Second, I demonstrate that recognizing employee stock options as warrants shows that there is a direct detriment to shareholders from any incentive these options provide for managers to increase firm risk. Previous studies, in contrast, posit that volatility increases are directly beneficial to shareholders because equity is analogous to a call option on the underlying firm value (e.g., Guay, 1999). Because employee stock options are warrants, however, shareholders assume a short position in these options when they are issued by the firm. A rise in the firm return volatility consequently benefits the employee stock option holders at the expense of the shareholders, ceteris paribus. In short, recognizing employee stock options as warrants shows how a security designed to ameliorate an agency conflict can actually exacerbate it. Third, I show the consequences of recognizing employee stock options as warrants, when these option claims are economically significant, for the measurement of a firm’s capital structure (in particular, for the measurement of its default risk). As warrant holders, employee stock option owners are investors in the firm, and their claim should be recognized as part of the firm’s capital structure. In contrast to other traditional investors in a firm such as common stockholders, employees do not pay cash for their options. They pay for them, for instance, by accepting lower cash compensation or putting more work into the firm. Regardless of how employees pay for their options, their issuance means the firm value is greater than the summation of the market value of its common stock, preferred stock and total debt (i.e., a traditional definition of firm value). In fact, I find that, for more than 36% of my sample firms, employee stock options represent a more significant claim on firm value than the firm’s debt and preferred stock combined. When I recognize employee stock options as part of a firm’s capital structure, I find that the traditional debt–equity ratio measure can overstate substantially a firm’s default risk. For example, my sample firms’ debt–equity ratios with employee stock options in the denominator are five percentage points lower, on average, than when these options are not included in the ratios. In other words, recognizing employee stock options as warrants reveals that the asset base is greater than the traditional firm value definition implies, and so the firm’s default risk is lower than the traditional debt–equity ratio implies. Finally, I make a secondary contribution to the literature by comparing the standard Black–Scholes option pricing model (SBS) valuation of these options to the valuation provided by the warrant version of the Black–Scholes option pricing model (WBS). Though previous work compares the SBS and WBS, no previous study conducts this comparison for employee stock option valuation (and, as suggested above, none of these or any other studies precede my three primary contributions to the literature). I find that the typical and average SBS valuation is close to the WBS valuation, and so the SBS is a reasonable approximation to the WBS in most cases. Nevertheless, I argue that it is better to use the WBS for two reasons. First, there can be large differences between the models’ valuation estimates. Second, the WBS is nearly as easy to estimate as the SBS. In the next section, I discuss the limited number of studies that examine non-executive employee stock options in conjunction with executive stock options; I also describe my sample selection procedures. I demonstrate the prevalence of employee stock options in Section 3. In Section 4, I show the consequences of recognizing these options as warrants (when they are economically significant) for the measurement of a firm’s capital structure and default risk, and for the agency conflict between management and shareholders. I summarize the paper in Section 5.

Historically, employee stock options have been an economically insignificant claim on firm values (e.g., Murphy, 1985). So even though employee stock options are analogous to warrants (because they are issued by the employees’ firm), previous work refers to low dilution ratios as a justification for ignoring the warrant characteristic of employee stock options. With my hand-collected sample of 1821 firms with employee (executive and non-executive) stock options, I make three primary contributions to the literature. First, I show that these options are now an economically significant claim for firms throughout the economy. The average dilution ratio for my sample is 12%, and it is more than 10% for my sample firms in the second-to-largest CRSP size decile (and for firms in the second-to-oldest period-of-listing decile). I also find average dilution ratios greater than 10% for my sample firms in many “Low-tech” industries. So, in contrast to previous research, I show that recognizing these options as warrants is not just important for small, upstart, Internet firms. Second, I demonstrate that recognizing employee stock options as warrants shows that shareholders assume a short position in these options when they are issued by the firm. A rise in the firm return volatility consequently benefits the employee stock option holders at the expense of the shareholders, ceteris paribus. In contrast, previous studies posit that volatility increases are directly beneficial to shareholders because levered equity is analogous to a call option on the underlying firm value. I demonstrate that, at the very least, the direct benefit that levered shareholders receive from volatility increases is dampened by the direct detriment they receive from their short position in the employee stock options. Third, I show the consequences of recognizing employee stock options as warrants (when these option claims are economically significant) for the measurement of a firm’s default risk and for the valuation of its common stock. As warrant holders, employee stock option owners are investors in the firm and their claim should be recognized as part of the firm’s capital structure. This implies that the traditional debt–equity ratio measure can overstate substantially a firm’s default risk. For example, my sample firms’ debt–equity ratios with employee stock options in the denominator are five percentage points lower, on average, than when these options are not included in the ratios. In other words, recognizing employee stock options as warrants reveals that the asset base is greater than the traditional firm value definition implies, and so the firm’s default risk is lower than the traditional debt–equity ratio implies. I also make a secondary contribution to the literature by comparing the standard Black–Scholes option pricing model (SBS) valuation of these options to the valuation provided by the warrant version of the Black–Scholes option pricing model (WBS). Though I find that the typical and average SBS valuation is close to the WBS valuation, I argue that it is better to use the WBS for two reasons. First, there can be large differences between the models’ valuation estimates. Second, the WBS is easy to estimate. In summary, I argue that dilution ratios have now reached a level of economic significance for many firms throughout the market (including those that does not fit the heretofore presumed profile presented in previous studies based on earlier sample periods) where it is important to recognize employee stock options as warrants. In particular, incorporate these options in the capital structure and default risk analysis, and recognize the problem that these options can exacerbate the agency conflict between management and shareholders.