Executive Director Remuneration in Blockholder-Dominated Firms: How Do Italian Firms Use Stock Options?

Abstract

Shareholder rights and director remuneration represents a highly debated but still controversial issue in corporate governance. The purpose of this study was to explore why blockholder-dominated listed firms use stock options as directors' remuneration tools. By using a unique hand-collected dataset comprising plans granted by Italian non financial listed companies, this paper shed light on why blockholder-dominated listed companies granted stock option plans to their directors. Specifically, empirical evidence concerning the characteristics and beneficiaries of the stock option plans given to Italian directors suggests that their diffusion may be hardly explained by optimal contracting theory. Optimal contracting theory seems able to explain no more than 40 out of the 161 plans analysed. In fact, we found evidence that other competing theories, such as rent-extraction theory, seem to provide a better explanation of corporate reality in blockholder-dominated listed firms.

Keywords: corporate governance, stock options, director remuneration, blockholder, expropriation, Italy

JEL Classification: G34, J33, K22, M41