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Evidence on exercise pricing in CEO option grants in two countries

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  • Jean Canil
  • Bruce Rosser

Abstract

This paper examines the relationship between exercise prices, grant size and CEO risk aversion employing a data set of Australian option grants characterized by exercise prices that vary relative to the stock price. We argue that Australian exercise price and grant size decisions provide an appropriate framework for evaluating the consequences of the U.S. practice of granting at-the-money options. Using a 3SLS estimation, we find that exercise prices are positive in grant size when internalizing CEO risk aversion but less so for the U.S. relative to Australia. We find also that CEO risk aversion is negatively related to both exercise prices and grant size in Australia but negatively related only to exercise prices in the U.S. A positive relation found between CEO risk aversion and grant size in the U.S. implies that risk aversion is addressed with larger grant sizes to compensate for fixed exercise prices. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Jean Canil & Bruce Rosser, 2015. "Evidence on exercise pricing in CEO option grants in two countries," Annals of Finance, Springer, vol. 11(3), pages 383-410, November.
    • Handle: RePEc:kap:annfin:v:11:y:2015:i:3:p:383-410
    DOI: 10.1007/s10436-015-0262-4
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    More about this item

    Keywords

    Executive compensation; Exercise prices; Grant size; Option grants; Risk aversion; Moneyness; M52; J33; G32;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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