Stock-Based Incentives in Europe: An Empirical Analysis

Abstract:     
We analyze the role of agency costs and corporate governance on the existence and relative weight of stock-based incentives in large European firms. Using a unique, manually-collected set of data covering all non-financial firms listed in the MSCI Europe, we are able to distinguish between internal governance mechanisms and external governance structures. In line with the hypothesis of governance substitution, we find that firm size and complexity foster the application of stock-based incentives, while strong stakeholders such as large block-holders and employee representatives on the board of directors decrease the likelihood of their existence. Examining institutional differences, we find that that the origin of law affects the probability of stock-based incentives and that high standards of transparency are a prerequisite for the application of stock-based incentives. Overall, our results indicate that firms use stock-based incentives to better align the interests of management and shareholders thereby taking into account the institutional environment.

Keywords: Stock-Based Incentives, Executive Compensation, Corporate Governance, Europe

JEL Classifications: G30, M52, J33

Working Paper Series