Abstract

Stock option is one of the most widely-used equity-based compensation scheme to mitigate misalignment between manager’s and shareholders’ interest.  And yet, it is sometimes suspiciously used as a tool of extracting shareholders’ wealth to managers (Bebchuk et al., 2009).  Typical way to do so is using the opportunistic timing such as backdating, spring-loading, etc.  As shown in Bebchuk et al. (2010), opportunistic timing of option grants increases the incident of lucky grant, which is that CEO receive stock option when the price is low.  We want to measure how this lucky grants affect technical innovation, which is one of the most critical sources of economic growth (Kogan et al, 2012).

Using patent citation as a proxy variable for technical innovation (Hall et al., 2005), we find that the probability of technical innovation decreases if CEO received lucky grant in the previous year.  To control possible endogeneity problem for determining CEO’s lucky grants, we also use Two-Stage Least Squares (2SLS) model, finding the consistent result with simple Ordinary Least Square (OLS) model.

Based on the results, we conclude that lucky grants may reduce the incentive for CEO to invest long-term project and negatively affect to firm’s technical innovation, which may hurt the value of the firm in the long run.

References

Bebchuk, L.A., Cohen, A., Ferrell, A., 2009. What matters in corporate governance? Review of Financial Studies 22, 783–827.

Bebchuk, L.,Grinstein, Y. and Peyer, U., 2010. Lucky CEOs and lucky directors, Journal of Finance 65, 2363-2401.

Hall, B.H., Jaffe, A., Trajtenberg, M., 2005. Market value and patent citations. RAND Journal of Economics 36, 16–38.

Kogan, L., Papanikolaou, D., Seru, A., Stoffman, N., 2012. Technological innovation, resource allocation, and growth (No. w17769). National Bureau of Economic Research.