The Adverse Consequences of Share-Based Pay in Risky Companies

Kyriacos Kyriacou () and Bryan Mase

Journal of Management & Governance, 2006, vol. 10, issue 3, 307-323

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

Keywords: company risk; Directors’ pay; diversification; insider trading; stock options (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s10997-006-9002-5

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