Corporate Governance and Stock-Based Incentives – An Analysis of European Firms
34 Pages Posted: 23 Jul 2009 Last revised: 5 Aug 2010
Date Written: August 4, 2010
We analyze the role of corporate governance in the use of stock-based incentives for executives of large European listed firms. Using a novel, hand-collected dataset covering non-financial firms from 13 European countries, we are able to distinguish between firm-level governance mechanisms and country-specific external governance structures. In line with the hypothesis of governance substitution, we find that firm size and operational complexity foster the use of stock-based incentives, while firms with large blockholders are less likely to grant such incentives. Examining institutional differences, we find that the origin of law affects the importance of stock-based incentives and that high standards of transparency and disclosure are considered a prerequisite for the dissemination of stock-based incentives. Overall, our results indicate that firms use stock-based incentives to align the interests of executives with those of shareholders whenever the institutional environment ensures sufficient transparency and effective shareholder rights.
Keywords: Stock-Based Incentives, Executive Compensation, Corporate Governance, Europe
JEL Classification: G30, M52, J33
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