Published: Jan 2016

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JEL Reference: O33,O35

Working Paper

The Diffusion of a Social Innovation: Executive Stock Options from 1936–2005


We study the increasing use of stock options to compensate executives in US corporations. As with many technological innovations, the adoption curve exhibits a classic S-shaped pattern: the rate rises slowly at first, then there is a period of rapid acceleration, and finally it tails off as the saturation level is approached. Using a longitudinal data set of Frydman and Saks (2010) supplemented with financial reports compiled by the authors, we argue that the diffusion of options was initially given a jump-start by a change in the tax law, but thereafter it was propelled by a process in which firms learned from the experience of earlier adopters. The notion that options spread primarily through social conformity or ‘jumping on the bandwagon’ is not borne out by the data.

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