Lease Financing, CEO’s Share Option Compensation, CEO’s Ownership: Evidence from the U.K.
University of St. Gallen
June 1, 2011
This paper aims to provide empirical evidence on the effects of CEO’s share option remuneration and CEO’s stock ownership on leasing. Financial contracting theory suggests that ownership structure is important determinant of capital structure, debt financing and leasing. Also, lease financing is a means of reducing the agency costs of debt. CEO’s remuneration packages should be more “highly” concentrated on performance based payments, such as long term share incentives, share options, instead of fixed fees, because it reduces the agency cost by giving CEOs more incentive and ownership in the company, which causes CEOs act more interest on equity holders. Accordingly, on this paper, it was assumed that CEOs having higher ownership and share option compensation should select leasing as a capital structure method since leasing helps to reduce agency cost and increase the firm value. However, it was found that it there are no significant relationship between CEO’s option compensation and total lease shares. For CEO ownership, I found that CEO’s stock ownership in value (£) is significantly and negatively correlated with total lease shares, which is contrary to the above expectation. On the other hand, percentage of CEO’s stock ownership is not significantly related to total lease shares. This paper contributes to practice because it guides shareholders how to decrease agency cost by using right means of financing and it is raising attention on the significance of performance related share option compensation method to increase the ownership of the CEO and to decrease agency cost and agency problem. For academy, due to the lack of research on this topic in Europe, it analyzed one of the biggest leasing sectors in the UK and compared the findings with those in the U.S.
Number of Pages in PDF File: 21
Keywords: Leasing, corporate governance, CEO share option, compensation, Agency Cost
JEL Classification: M4, M41, G3working papers series
Date posted: April 12, 2012
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