Stock Option Adoption and Irrational Exuberance : The Impact on Profitability

We evaluate the impact of the adoption of stock options on firms' financial performance. If stock options are an efficient incentive contract we would expect their adoption to increase both operating income (OI) and return on assets (ROA). Alternatively, stock options may provide an incentive to focus too much on growth resulting in either lower OI or higher OI but lower ROA. We find evidence that stock options significantly increase OI and investments in assets but significantly decrease ROA