The Diffusion of Equity Incentive Plans in Italian Listed Companies: What is the Trigger?

Abstract

Our study recommends that policymakers improve the disclosure rules about these plans and avoid the introduction of fiscal benefits that provide an incentive to promote some compensation schemes over others. Moreover, our results encourage members of remuneration committees to pay attention to specific characteristics of the plans. Our findings contribute to the expansion of the traditional knowledge about reasons behind the adoption of equity incentive plans outside Anglo-Saxon countries. Further, they provide support for a symbolic perspective of corporate governance, according to which the introduction of new governance practices may not imply substantive governance reforms. To gain a deep understanding of the phenomenon, we collected data on both the diffusion and the technical aspects of equity incentive plans adopted by Italian listed companies in 1999 and 2005. The results show that 1) the determinant of their adoption is the firm size, rather than the absence of a controlling shareholder; 2) these plans are not extensively used to extract company value, although few cases suggest this possibility; and 3) plans' characteristics generally comply with the requirements in tax law, so that fiscal benefits can be accessed. Recent dynamics in the institutional and market environment facilitated the propagation of equity incentive plans outside the US and the UK. This study sheds light on the reasons behind the diffusion of these plans in Italy, a country where companies are usually controlled by a blockholder and these instruments were almost absent.EmpiricalRecent dynamics in the institutional and market environment facilitated the propagation of equity incentive plans outside the US and the UK. This study sheds light on the reasons behind the diffusion of these plans in Italy, a country where companies are usually controlled by a blockholder and these instruments were almost absent. To gain a deep understanding of the phenomenon, we collected data on both the diffusion and the technical aspects of equity incentive plans adopted by Italian listed companies in 1999 and 2005. The results show that 1) the determinant of their adoption is the firm size, rather than the absence of a controlling shareholder; 2) these plans are not extensively used to extract company value, although few cases suggest this possibility; and 3) plans' characteristics generally comply with the requirements in tax law, so that fiscal benefits can be accessed.Our findings contribute to the expansion of the traditional knowledge about reasons behind the adoption of equity incentive plans outside Anglo-Saxon countries. Further, they provide support for a symbolic perspective of corporate governance, according to which the introduction of new governance practices may not imply substantive governance reforms.Our study recommends that policymakers improve the disclosure rules about these plans and avoid the introduction of fiscal benefits that provide an incentive to promote some compensation schemes over others. Moreover, our results encourage members of remuneration committees to pay attention to specific characteristics of the plans.