Effects of Option Incentive Compensation on Corporate Innovation: The Case of China

Abstract

This study examines the effect of option incentives on corporate innovation in a representative emerging and transitioning economy. Using data from China, we show that option incentives have significant positive impacts on two crucial aspects of innovation: inputs and outputs. Innovation efficiency consistently improves after the introduction of option incentives. These positive effects remain when we control for potential endogeneity using difference-in-differences estimation with propensity score matching. Option incentives have more pronounced effects in high-tech firms than in other firms. Our findings suggest that firms’ specific characteristics and needs should be considered when developing incentive policies.