Summary
We examine whether options granted to non-executive employees affect the performance of the firm by exploring the link between broad-based option plans, option portfolio implied incentives, and firm operating performance. We employ an instrumental variables approach that combines information about the characteristics of the labor market in which firms compete with information on firm option programs from the IRRC to identify causal effects. Firms that broadly grant options to non-executive employees and firms for which non-executive employee option portfolios have higher implied incentives exhibit higher subsequent operating performance. Intuitively, the incentive-performance effect is concentrated in firms with fewer employees and in firms with higher growth opportunities per employee. Additionally, the effect is concentrated in firms that grant options broadly to non-executive employees, consistent with theories of cooperation and mutual monitoring among co-workers.