Do CEO stock options improve firm performance?

Using panel data to control for CEO, firm, and industry heterogeneity, I measure the impact of CEO stock options on firm performance in the 1990s. I find that lagged stock options significantly increase shareholder returns and net income, more than compensating for the cost of the options. An alternative explanation is that CEOs who are optimistic about firm prospects push for larger option grants. I also find evidence to suggest that CEOs manipulate reported earnings to maximize option payoffs. The results do not seem driven by tax and accounting anomalies. However, they are quite sensitive to outliers, highlighting the need for further research.