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Corporate governance and the design of stock option programs

Zacharias Sautner and Martin Weber

No 05-32, Papers from Sonderforschungsbreich 504

Abstract: 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.

Keywords: Stock Option Programs; Program Design; Corporate Governance; Empirical Evidence; European Data (search for similar items in EconPapers)
JEL-codes: G32 G34 M52 (search for similar items in EconPapers)
Date: 2005
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