Abstract
Following Oyer (2004) and Rajgopal, Shevlin and Zamora (2006), we provide evidence that the level of stock option compensation results from outside opportunities in the managerial labor market for a sample of 3,214 CEO-year observations from S&P1500 companies between 1996 and 2010. We argue that stock-based compensation converts into severance pay in the case of forced CEO departure. Consistent with Almazan and Suarez (2003), we argue that severance pay protects CEOs' relation-specific investments from hold-up by firms. Our analysis also provides some evidence that equity grants are inversely related to labor market competition in the penultimate year of forced CEO departure.
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