Assessing the role of option grants to CEOs: How important is heterogeneity?

Nina Baranchuk and Siddhartha Chib

Journal of Empirical Finance, 2008, vol. 15, issue 2, 145-166

Abstract: This paper revisits the question of whether CEO compensation practices are in keeping with those justified by agency theory. We develop and analyze a new panel Tobit model, estimated by modern Bayesian methods, in which the heterogeneity of covariate effects across firms is modeled in a hierarchical way. We find that our specification of heterogeneity provides a significantly improved fit to the data. Our results show support for the hypothesis that companies increase option awards to their CEOs when agency problems become more pronounced. We also find that liquidity constraints matter in defining the cash-option mix of CEO compensation.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:15:y:2008:i:2:p:145-166

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