Implications of Ex Post Estimation Error in CEO Option Grants
Mark C. Anderson
University of Calgary - Haskayne School of Business
Bauer College of Business University of Houston
January 15, 2012
CAAA Annual Conference 2012
Companies report two measures of CEO option pay. Grant-date fair values are initial estimates of the expected values of future option contract settlements. Payouts from exercise are realized values from option contracts settled during a year. We call the difference between cumulative grant-date fair values and payouts from exercise over a CEO’s tenure “ex post estimation error” because it represents information about factors that affect option settlements that is not available at the grant dates. Ex post estimation errors amount to 27% of cumulative grant-date fair values for ExecuComp CEOs from 1992 to 2009. We predict and find that outsider CEOs have significantly higher ex post estimation errors than insider CEOs, after controlling for CEO performance and tenure. This implies that pay comparisons based solely on grant-date values are inequitable. We test whether pay-based shareholder activism decreases with ex post estimation error but do not find that it does. This implies that shareholders may overlook information about factors that affect option settlements when making targeting decisions.
Number of Pages in PDF File: 47
Keywords: CEO compensation, stock options, outsider CEOs, option exercise, shareholder activism
JEL Classification: J33, J41, G32working papers series
Date posted: January 16, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.563 seconds