Abstract
This paper examines the impact of CEO option compensation on firm capital structure decisions. Using IRC 162(m) introduction as a natural experiment to clarify the identification issues, the evidence provides strong support to agency and trade-off theories. The findings indicate that CEOs choose to raise less debt to fund their projects as they are paid via more option grants and as a higher percentage of the firm’s future cash flows are granted to them. This decision also holds for the case where CEOs are compensated with more valuable options. These results about this relationship clarify the conflicting evidence previously documented in literature.
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