In this paper we study whether stock option schemes affect firm technical inefficiency. We estimate Cobb-Douglas stochastic production frontier models using a novel panel data set on the publicly listed Finnish firms in the manufacturing and ICT sectors over the period from 1992 to 2002. We find evidence that the mean inefficiency estimates in the ICT sector are clearly higher than in the manufacturing sector. Furthermore, our empirical findings suggest that broad-based option firms may have higher mean inefficiency than selective and non-option firms in the manufacturing sector. The quantitative assessments of the marginal effects on the inefficiency support the view that especially broad-based schemes affect the mean and the variance of the inefficiency term uit in the manufacturing sector, but not in the ICT sector. Our findings do not provide empirical support for the view that stock option schemes reduce firm technical inefficiency
