haveloweroptionexpensesthanexpected(giventheindustry
standards) and decreasing at companies that have higher
optionexpensesthanexpected.Wewouldexpectthatmany
ofthelattergroup,though,willreduceoptiongrantstobring
themclosertoindustryaverages.Thenetresultwillbefewer
employeeoptiongrants,morestandardizationofgrantsacross
companiesinasector,andnolargemarketimpactwhenFAS
123R finally comes into effect.
Consequences of Option-Based Compensation
Earlierinthischapter,welookedatthereasonsbehindthe
shift toward equity compensation in recent years. The
granting of employee options, in addition to affecting
earnings and value, also has implications for corporate
financialpolicy.Aswewillseeinthissection,firmsthatuse
employee options extensively adopt very different
investment,financing,anddividendpolicies thanfirms that
donot.Whileasignificantportionofthedifferencescanbe
attributed to thefact that option-grantingfirms tendto be
younger, higher-growth,andhigher-riskfirms, some ofthe
differences can be attributed directly to the presence of
employee options and their effects on management incentives.
Investment Policy
Conventional corporate financial theory recommends that
firmspickinvestmentsthathavepositivenetpresentvalues
but is generally agnostic about risk in projects. In other
words,firmsshouldacceptbothsafeandriskyprojectswith
positive net present values, assuming of course that the
discountrates used to analyzethe projectsincorporate the
risk.Iftwoprojectshavethesamenetpresentvalue,firms