The information content of options trading for the CEO employee pay ratio

This research examines how option trading activity reduces information asymmetry through the CEO’s and ordinary employee’s awareness of firm value and their pay related to firm performance. Our findings demonstrate that companies with more options trading activity have a higher CEO-employee pay ratio, which is consistent with the tournament theory. Option trading illustrates that both CEOs and employees understand their relevant payment based on the precise firm value. This advantage of option trading becomes weak for firms with higher profitability, for employees with more bargaining power, and for CEOs with a higher risk incentive.