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The Adverse Consequences of Share-Based Pay in Risky Companies

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Author Info
Kyriacos Kyriacou ()
Bryan Mase
Abstract

Shareholders increasingly regard it as desirable to link director pay packages to the share price, in order to align directors’ incentives with those of the shareholders. The result of such remuneration packages is that directors’ wealth will become concentrated in one stock, giving them an undiversified portfolio of shares. The resulting need to diversify will encourage directors to exercise their share options, irrespective of their expectations about future stock price performance. This benefit to diversifying will be greater the riskier the stock. Consistent with this, this paper finds that only option exercises in relatively low risk companies are informed, and precede significantly negative abnormal returns over the following 2-month period. As a result, providing directors in riskier companies with share-based pay packages might not be effective in aligning their incentives with those of the shareholders. Copyright Springer 2006

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File URL: http://hdl.handle.net/10.1007/s10997-006-9002-5
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Publisher Info
Article provided by Springer in its journal Journal of Management & Governance.

Volume (Year): 10 (2006)
Issue (Month): 3 (September)
Pages: 307-323
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Handle: RePEc:kap:jmgtgv:v:10:y:2006:i:3:p:307-323

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Web page: http://www.springerlink.com/link.asp?id=102940

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Related research
Keywords: company risk; Directors’ pay; diversification; insider trading; stock options;

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  8. Yanbo Jin & Philippe Jorion, 2006. "Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 61(2), pages 893-919, 04. [Downloadable!] (restricted)
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  10. May, Don O, 1995. " Do Managerial Motives Influence Firm Risk Reduction Strategies?," Journal of Finance, American Finance Association, vol. 50(4), pages 1291-1308, September. [Downloadable!] (restricted)
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