FIRM HETEROGENEITY IN

GROWTH OPTIONVALUE: THE

ROLE OF MANAGERIAL
INCENTIVES

PRITI SINGH
INTRODUCTION
 Managerial incentive may interact with industry
growth opportunity .
HYOTHESIS
 1 stock option holdings will be positively associated with growth option
value
 2 managerial stock ownership will be positively associated with growth
option value.
 3 short term pay will be negatively associated with growth option value
 4 a the positive influence of stock option holdings on growth option value
will be stronger in industries with greater growth opportunities.
 the positive influence of managerial stock ownership on growth option value
will be stronger in industries with greater growth opportunities
 The negative influence of managerial stock ownership on growth option
value will be stronger in industries with greater growth opportunities
RESEARCH DESDIN
 Initial sample – stewart performance 1000
database
 Sampling period – 1994-2000
 Sample – 819
 Dependent variable – growth option value
 Independent variables – stock options holding ,
managerial stock ownership , industry growth
opportunities and short term pay .
 Control variables firm size ,firm age ,availability
capital, firm leverage
ANALYSIS
 Arellano –bond dynamic panel data –GMM
 S&P 500 index as additional exogenous instrument
 S&P 500 reflects the value of equity based
incentives
Result
 Hyothesis-1 supported coefficient for stock option holdings is
positive and significant (p<.005%)
 Hypothesis -2 supported variable managerial stock ownership
(p=0.079)
 Hypothesis-3 supported short term pay negative and
significant (p<.001)
 Hypothesis 4a-_4C supported stock option holding and
industry growth opportunities is positive (p<.005,p)
 Hypothesis 4b managerial stock ownership and industry growth
opportunities is positive and moderate significant p=.078)
Discussion
 Structure of the payoff to manager from equity
based to growth options ,are motivated
 Short term pay have opposite effect.
 Emphasize the need to examine how organizational
mechanism influence firms realization of real option
value .
Limitations
 Sample apply to large firm only
 Measure of growth option value capture the firm
portfolio of future growth opportunities
 Growth value calculated as residual measure using
the value may be senstitive to variations in firms
earnings, cost of capital and market etc
Conclusion
 Real options theory
 Sources of heterogeneity & empirical analysis to
developed conceptual framwork
 But factor also affects realization of option value