Leverage and growth: Effect of stock options
AbstractPrevious literature documents a negative relationship between leverage and firm growth. This paper finds that once the incentives provided by stock options are accounted for, leverage does not affect firm growth. The paper also finds that the sensitivity of CEOs’ wealth to stock price (i.e. option delta) instead of leverage has a negative relationship with growth. These findings suggest that incentive contracts that tie managers’ wealth to firm value prevent managers from overinvesting. Thus in presence of options the role of debt as a disciplining mechanism has become less important.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economics and Business.
Volume (Year): 63 (2011)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/jeconbus
G31; G32; D92; J33; Leverage; Growth; Stock-based compensation;
Other versions of this item:
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
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