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The Use of Equity Grants to Manage Optimal Equity Incentive Levels

47 Pages Posted: 10 Nov 1998 Last revised: 19 Feb 2015

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Wayne R. Guay

University of Pennsylvania - Accounting Department

Date Written: September 1999

Abstract

We predict and find that firms use annual grants of options and restricted stock to CEOs to manage the optimal level of equity incentives. We model optimal equity incentive levels for CEOs, and use the residuals from this model to measure deviations between CEOs’ holdings of equity incentives and optimal levels. We find that grants of new incentives from options and restricted stock are negatively related to these deviations. Overall, our evidence suggests that firms set optimal equity incentive levels and grant new equity incentives in a manner that is consistent with economic theory.

JEL Classification: G30, J33, M41

Suggested Citation

Core, John E. and Guay, Wayne R., The Use of Equity Grants to Manage Optimal Equity Incentive Levels (September 1999). Available at SSRN: https://ssrn.com/abstract=138272 or http://dx.doi.org/10.2139/ssrn.138272

John E. Core (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02138
United States

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

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