Firm Volatility and Stock Option Incidence



In this paper, I present two models that describe the relationship between stock option incidence and stock price volatility. First, I present an industry-clockspeed human resources (HR) model. Firms in industries where products obsolesce quickly will grant stock options to motivate employees to exert high e.ort and shorten the product development cycle, which increases volatility of .rm performance. In the second approach, I present a model of cash-constrained .rms, where .rm stock price volatility is positively related to borrowing costs. If borrowing costs increase with performance volatility and risk, .rms will stock options to conserve cash. Using the IT data, I .nd that option incidence is positively related to .rm volatility, which is consistent with the implications of both models, while the relationship between options incidence and .rm size and wages is more consistent with the Clockspeed-HR model.