The Effect of Executive Stock Option Delta and Vega on the Spin-Off Decision
47 Pages Posted: 12 Nov 2018
Date Written: May 2018
We investigate the role of CEO incentives around asset restructuring known as corporate spin-off. More specifically, we focus on executive stock option delta and vega vis-à-vis changes in firm value and firm riskiness in response to the corporate spin-off. Controlling for self-selection of the spin-off decision, we find that executive stock option vega is positively related to changes in firm value as well as changes in firm risk. Conversely, we find that executive stock option delta is negatively related to changes in firm value and firm risk. Finally, we estimate the Fazzari, Hubbard, and Petersen (1988) investment model and show that at the business segment level, CEO incentives are positively linked to capital spending. Overall, our study extends the current literature by documenting the role of executive stock option delta and vega in the context of corporate spinoff.
Keywords: spin-off, spinoff, divestiture, executive compensation, executive stock option delta, executive stock option vega, firm value, firm risk
JEL Classification: J33, G32, G34
Suggested Citation: Suggested Citation