Employee Stock Options and Corporate Innovation



We examine whether employee stock options motivate employees to contribute to corporate innovation. Our analysis shows that the innovation output in a firm measured by the numbers of total patents applied, total citations of the patents, and citations per patent significantly increases with the non-executive stock options per employee after controlling for the research and development (R&D) expenditures and CEO incentives. The positive effects of employee stock options on corporate innovation are more evident in subsamples of firms in more unionized industries, firms where employees are more difficult to retain, firms with a weaker free-riding problem among employees, firms whose stock options have a longer expiration period, and firms that organize a broad-based employee stock option plan. Finally, we show that the enhancement of corporate innovation productivity is mainly from an increase in employees’ risk-taking incentives (vega) rather than employees’ interest-alignment incentives (delta). Taken together, these findings suggest that employee stock options enhance employees’ risk-taking incentives and failure-bearing capacities in a firm’s high risk-profile innovative activities, leading to a significant improvement in the productivity of corporate innovation.
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Contact information:
Sebastian Gryglewicz