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Are CEO stock option grants optimal? Evidence from family firms and non-family firms around the Sarbanes–Oxley Act

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  • Hongfei Tang

Abstract

This paper investigates the optimality of stock option grants to Chief Executive Officers (CEOs) by examining a set of S&P 500 companies around the passage of the Sarbanes–Oxley Act (SOX). I find that stock option grants to non-founding-family CEOs decreased dramatically after the passage of SOX. In addition, non-family firms granted significantly more stock options than family firms before the SOX, but not after its passage. These findings are consistent with the interpretation that CEOs use stock option grants as tools to extract rents from shareholders. This interpretation is further supported by evidence that the large decrease in stock option grants after the SOX was passed is not detrimental to firm performance, and by evidence from a test of the trade-off between option and non-option compensation. Copyright Springer Science+Business Media New York 2014

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  • Hongfei Tang, 2014. "Are CEO stock option grants optimal? Evidence from family firms and non-family firms around the Sarbanes–Oxley Act," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 251-292, February.
    • Handle: RePEc:kap:rqfnac:v:42:y:2014:i:2:p:251-292
    DOI: 10.1007/s11156-012-0341-9
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    4. Semih Tartaroglu & Michael Imhof, 2017. "Insider trading and response to earnings announcements: the impact of accelerated disclosure requirements," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 315-336, August.

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    More about this item

    Keywords

    Stock option grants; CEO compensation; The Sarbanes–Oxley Act; Managerial power; Optimal contracting theory; Family firms; G30; G34;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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