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Corporate Governance and the Design of Stock Option Programs

  • Sautner, Zacharias

    ()

    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

  • Weber, Martin

    ()

    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

Investors and academics increasingly criticize that features of employee stock option (ESO) programs reflect rent-extraction by managers (managerial power view). We use a unique European data set to investigate the relationship between the design of ESO programs and corporate governance structures. We find that ownership structures are related to the ESO design in a way that is consistent with the managerial power hypothesis: when ownership concentration is low and the exposition to the U.S. capital market is little, executives extract rents by designing poor ESO plans. Moreover, firms with weak creditor rights more often have badly designed option plans. Our findings also suggest that ineffective board structures (insider-dominated boards) are related to ESO design in a way that supports the arguments of the self-dealing view.

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File URL: http://www.sfb504.uni-mannheim.de/publications/dp05-32.pdf
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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 05-32.

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Length: 40 pages
Date of creation: 12 Oct 2005
Date of revision:
Handle: RePEc:xrs:sfbmaa:05-32
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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