Determinants of the Introduction of Stock Options by Japanese Firms: Analysis from the Incentive and Selection Perspectives*

Abstract

This paper examines the determinants of the introduction of stock options in Japan, in response to their deregulation, from the incentive and selection perspectives. Younger firms use broad-based stock options more often, even after controlling firm size, growth, and the possibility of a liquidity constraint. Moreover, stock price volatility increases the adoption of stock options only when a firm is young. These results support the relevancy of a selection view that focuses on efficient project choice. Stock options are used more often by fast-growing firms and less in regulated industries and by the firms with concentrated ownership structure, consistent with both views.