The Impact of Directors' Option Compensation on Their Independence
48 Pages Posted: 4 Apr 2005
Date Written: February 2005
Abstract
This study examines how the use of option-based compensation for directors affects their independence in their decisions on CEOs' option-grant dates. Firms typically grant CEOs at-the-money options, i.e., with the strike price set equal to the grant-day stock price. This practice creates a unique opportunity for CEOs to benefit from Timing Opportunism, whereby CEOs lower the grant-day stock price in order to increase the value of their option grants. Prior evidence indicates the existence of timing opportunism, because CEOs tend to receive options before (after) good news (bad news). Since directors frequently receive options at the same time as CEOs, directors also benefit from timing opportunism, so they may not have an incentive to constrain CEOs' timing opportunism. We hypothesize that, ceteris paribus, directors are more likely to constrain CEOs' timing opportunism when these directors receive a lower proportion of their compensation from stock options. We find evidence consistent with our hypothesis in a large sample from 1992 to 2002. Our results indicate that, when used as a common component of CEOs' and directors' compensation, stock options can compromise director independence in this particular setting.
Keywords: Corporate governance, stock option grants, directors' option grants, director independence
JEL Classification: G34, M41, M52, J33
Suggested Citation: Suggested Citation
Here is the Coronavirus
related research on SSRN
Recommended Papers
-
The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems
-
The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems
-
The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
-
CEO Involvement in the Selection of New Board Members: An Empirical Analysis
By David Yermack and Anil Shivdasani
-
The Uncertain Relationship between Board Composition and Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence and Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black
-
The Non-Correlation between Board Independence And Long-Term Firm Performance
By Sanjai Bhagat and Bernard S. Black
