The effects of executive share options and investment opportunities on firms’ accounting performance: some Australian evidence

This paper provides evidence that firms with high investment opportunities and share options are associated with lower agency costs measured in terms of better accounting performance. The results of this study of 753 observations of 251 Australian firms over the three years 1998–2000 show that firms with high growth and executive share option plans are associated with better firm performance. In addition, this study shows that executives have greater risk-bearing preferences at higher option levels. That is, it is the combination of both high growth opportunities and high levels of options that is associated with higher financial performance. The results of this study suggest that it is economically irrational for low growth firms to use options as a means to motivate executives to increase firm performance. Further analysis revealed that these associations are not endogenously determined.