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Implications of Estimation Error in Option Grants for Evaluating CEO PayMark C. AndersonUniversity of Calgary - Haskayne School of Business Volkan MusluBauer College of Business University of Houston September 2011 AAA 2011 Management Accounting Section (MAS) Meeting Paper Abstract: We document a large gap between reported estimated values of stock option grants to CEOs and CEOs’ proceeds from option exercises. On average, CEOs realized 30% less than the reported value of option grants. We investigate two ways that this estimation error affects evaluation and monitoring of CEO pay. First, we predict and find higher estimation error for CEOs hired externally than for CEOs hired internally. Without the estimation error, compensation of outsider CEOs is not significantly different from that of insider CEOs - contrary to prior evidence that relies on estimated values. Second, we test whether estimation error affects shareholder monitoring through shareholder proposals and “vote no” campaigns and find evidence that it does. (This paper was formerly titled "On the Quality of CEO Option Pay Estimates")
Number of Pages in PDF File: 42 Keywords: CEO compensation, stock options, outsider CEOs, option exercise, shareholder activism JEL Classification: J33, J41, G32 working papers seriesDate posted: June 12, 2010 ; Last revised: November 12, 2011Suggested CitationContact Information
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