Corporate Governance and the Design of Stock Option Contracts
50 Pages Posted: 24 Oct 2005 Last revised: 15 Apr 2015
Date Written: February 3, 2011
We use unique and proprietary data to investigate the design of executive stock option (ESO) contracts of large European firms. We document a large heterogeneity in the ESO plan design. We then construct a score of the CEO friendliness of the plan design and study the relationship between this score and corporate governance structures. We find that firms with lower ownership concentration and fewer outsiders on the board have option plans that are more CEO friendly. We control for firm characteristics, industry and country fixed effects.We show that plans that are designed CEO friendly coincide with large volumes of CEO options and with excess CEO compensation. Consistent with a managerial power interpretation of our results and unlike predictions of an optimal contracting view, we find that firms with more friendly plans show a lower subsequent operating performance.
Keywords: Stock Option Programs, Program Design, Corporate Governance, Empirical Evidence
JEL Classification: G32, G34, M52
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