Corporate governance and the design of stock option programs

Sautner, Zacharias ; Weber, Martin

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URN: urn:nbn:de:bsz:180-madoc-17828
Document Type: Working paper
Year of publication: 2006
The title of a journal, publication series: Working papers / Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre
Volume: 134
Place of publication: Mannheim
Publication language: English
Institution: Business School > Sonstige - Fakultät für Betriebswirtschaftslehre
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Classification: JEL: G32 G34 M52 ,
Subject headings (SWD): Aktienoptionsplan , Softwareentwicklung , Management , Grundsatz , Empirische Wirtschaftsforschung
Keywords (English): Stock Option Programs , Program Design , Corporate Governance , Empirical Evidence
Abstract: Investors and academics increasingly criticize that various design features of executive stock option (ESO) plans reflect self-dealing by managers and the inability of corporate governance mechanisms in monitoring executives (managerial power hypothesis). We use a unique and not publicly available data set to investigate design features of ESO programs. The companies in our sample show a very large variation with respect to the characteristics of their ESO plans (e.g. in the use of relative performance targets that need to be met before options become exercisable). We study the relationship between the design of ESO plans and corporate governance structures to test the managerial power hypothesis. We document that when governance structures are weak, option plans are designed in a way desired by managers. When ownership concentration is low, firms more often have ESO plans that are favorable to executives. We also find that firms with fewer outside board members and weaker creditor rights more often have option plans that are favorable to managers. Favorable ESO plans usually coincide with large option packages.

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