Corporate Governance and the Design of Stock Option Contracts

AFA 2007 Chicago Meetings Paper

EFA 2006 Zurich Meetings

Die Betriebswirtschaft, 71, 331-354.

50 Pages Posted: 24 Oct 2005 Last revised: 15 Apr 2015

See all articles by Zacharias Sautner

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH; European Corporate Governance Institute (ECGI)

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: February 3, 2011

Abstract

We use unique and proprietary data to investigate the design of executive stock option (ESO) contracts of large European firms. We document a large heterogeneity in the ESO plan design. We then construct a score of the CEO friendliness of the plan design and study the relationship between this score and corporate governance structures. We find that firms with lower ownership concentration and fewer outsiders on the board have option plans that are more CEO friendly. We control for firm characteristics, industry and country fixed effects.We show that plans that are designed CEO friendly coincide with large volumes of CEO options and with excess CEO compensation. Consistent with a managerial power interpretation of our results and unlike predictions of an optimal contracting view, we find that firms with more friendly plans show a lower subsequent operating performance.

Keywords: Stock Option Programs, Program Design, Corporate Governance, Empirical Evidence

JEL Classification: G32, G34, M52

Suggested Citation

Sautner, Zacharias and Weber, Martin, Corporate Governance and the Design of Stock Option Contracts (February 3, 2011). AFA 2007 Chicago Meetings Paper; EFA 2006 Zurich Meetings; Die Betriebswirtschaft, 71, 331-354.. Available at SSRN: https://ssrn.com/abstract=825429 or http://dx.doi.org/10.2139/ssrn.825429

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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