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Stock Option Grant Announcements and Shareholder Value

Study Shows That Shareholders React Positively to Broad-Based Option Grant Announcements But Not to Grants Just to Top People

In a 2003 study by Eric Hager of the University of British Columbia, shareholder reaction to announcements of stock options grants was analyzed to determine how shareholders reacted to announcements for broad-based options grants. Announcements were excluded that did not indicate employees received stock options, but were included if employees only or employees received options in addition to managers, executives, directors and/or consultants. The study, "Do Employee Stock Option Grant Announcements Affect Shareholder Value?", is being published in the summer 2003 issue of the NCEO's Journal of Employee Ownership Law and Finance.

Hager looked at companies in Canada and the U.S. For companies to be included in the study, there had to be sufficient trading data available for the period from 120 days prior to the announcement to one day after. There also had to be a clear announcement of actual grants being made, rather than the announcement of a stock option plan. Hager points out that the announcement of a plan can be misleading because a plan may make a certain number of employees eligible for a grant but actually only make grants to a much smaller number. So Hager instead looked at actual grant practices. A total of 91 announcement grants were suitable for inclusion in the event study for Canada and 54 in the U.S. The U.S. grants were from 1993-2002 and Canada from 1995 through 2002. Hager used a standard event-study methodology to extract abnormal returns to shareholders, that is, returns greater or less than what would have been predicted in the day following the announcement based on how a model accounting for other companies in the industry performed.

For Canadian companies, Hager found that returns were up 2.13% over what would have been expected for broad grants, and 2.33% greater when more than 1% of the equity was granted. The results were not affected by looking at grants only after 9/1/00, when the markets began to fall sharply. For U.S. companies, Hager found that returns were up 1.78% over what would have been expected for broad grants when more than 1% of the equity was granted, but there was no significant relationship when less was granted. Again, the results were not significantly affected by looking at grants only after September 1, 2000. The findings for the broad-based grants were statistically significant (that is, not likely to be a result of random variation).

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