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Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design

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  • Rosenberg, Matts

    ()
    (Swedish School of Economics and Business Administration)

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    Abstract

    This paper addresses several questions in the compensation literature by examining stock option compensation practices of Finnish firms. First, the results indicate that principal-agent theory succeeds quite well in predicting the use of stock options. Proxies for monitoring costs, growth opportunities, ownership structure, and risk are found to determine the use of incentives consistent with theory. Furthermore, the paper examines whether determinants of stock options targeted to top management differ from determinants of broad-based stock option plans. Some evidence is found that factors driving these two types of incentives differ. Second, the results reveal that systematic risk significantly increases the likelihood that firms adopt stock option plans, whereas total firm risk and unsystematic risk do not seem to affect this decision. Third, the results show that growth opportunities are related to time-dimensional contracting frequency, consistent with the argument that incentive levels deviate more rapidly from optimum in firms with high growth opportunities. Finally, the results suggest that vesting schedules are decreasing in financial leverage, and that contract maturity is decreasing in firm focus. In addition, both vesting schedules and contract maturity tend to be longer in firms involving state ownership.

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    File URL: http://dhanken.shh.fi/dspace/bitstream/10227/182/2/496-951-555-806-9.pdf
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    Bibliographic Info

    Paper provided by Hanken School of Economics in its series Working Papers with number 496.

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    Length: 45 pages
    Date of creation: 01 Aug 2003
    Date of revision:
    Handle: RePEc:hhb:hanken:0496

    Contact details of provider:
    Postal: Hanken School of Economics, Arkadiankatu 22, P.O.B. 479; FIN 00101 Helsinki, Finland
    Phone: +358-9-431 331
    Fax: +358-9-431 33 333
    Web page: http://www.hanken.fi
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    Related research

    Keywords: Stock option incentives; Principal-agent theory; Contract design;

    This paper has been announced in the following NEP Reports:

    References

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