CEO Stock Option Research Articles

The Role of Affect in Shaping the Behavioral Consequences of CEO Option Incentives

We advance behavioral agency theory by exploring the influence of mood or “affect” on the behavioral consequences of stock option incentives. Drawing on insights from psychology and behavioral decision theory, we describe how affect influences agent risk behavior. We argue that positive affect amplifies both the extent to which executives reduce strategic risk taking in response to risk bearing and engage in strategic risk taking in response to incentives for further enrichment. Building again on the psychology literature, we describe how CEO accountability attenuates the influence of affect on CEO risk behavior in response to stock option incentives. We test our expectations in a longitudinal data set of CEO stock option incentives, affect, and strategic risk taking by U.S. firms.

The influence of CEO equity incentives on licensing

In a study of life science firms, we find that, in accordance with predictions drawn from agency theory and behavioral agency theory, CEO stock ownership is negatively associated with licensing while CEO stock options are positively associated with licensing. Furthermore, by combining theoretical insights from the capabilities literature with both agency theory and behavioral agency theory, we predict that a key measure of capabilities in the licensing context—a firm's alliance experience—significantly influences the ways in which CEO equity incentives impact licensing. More specifically, we find that, in accordance with our theoretical predictions, alliance experience positively (negatively) moderates the relationship between CEO stock ownership (CEO stock options) and licensing. Our study contributes to the wider literature on the determinants of licensing by examining whether licensing is sensitive to CEO equity incentives. We also extend the capabilities literature on licensing by examining the contrasting influences of a firm's alliance experience on the relationship between CEO equity incentives and licensing. Our findings also inform behavioral agency-based research on the effects of equity incentives by highlighting the usefulness of a capabilities perspective in augmenting our understanding of the behavioral role of CEO equity incentives.

Stock options and credit default swaps in risk management

The use of stock options and credit default swaps (CDS) in banks is not uncommon. Stock options can induce risk-taking incentives, while CDS can be used to hedge against credit risk. Building on the existing literature on executive compensation and risk management, our study contributes novel empirical support for the role of stock options in restraining the use of CDS for hedging purposes. Based on data of CEO stock options and CDS held by 60 European banks during the period 2006–2011, we find a negative relationship between option-induced risk-taking incentives (vega) and the proportion of CDS held for hedging. However, the extent of CDS held for hedging is found to be positively related to default risk in the period leading to the financial crisis that erupted in 2007. The findings imply that restraining the use of stock options can incentivize hedging with CDS, but this risk management strategy will not necessarily produce lower default risk in times of systemic credit crisis.

Impact of executive compensation on the execution of IT-based environmental strategies under competition

Drawing on agency theory and the contingent natural resource-based theory, this study employs firm-level archival and survey data of US manufacturing firms to examine the impact of CEO compensation forms on the execution of IT-based environmental strategies and the moderating influence of competitive intensity on this impact. The findings reveal that CEO fixed pay and bonus negatively affect the execution of the two types of IT-based environmental strategies, green IT strategies and IT-enabled green strategies, whereas CEO stock option positively influences such execution. The moderation analysis further highlights that while competitive intensity reinforces the positive impact of CEO stock option on both strategies, it weakens the negative impact of CEO fixed pay and bonus only on IT-enabled green strategies. The findings suggest that a highly competitive operating setting represents an ideal setting for using stock option to motivate CEOs to execute these two strategies. At the minimum, this setting helps mitigate the deterrent effect of fixed pay and bonus on CEOs’ execution of IT-enabled green strategies. The findings also suggest that firms should align their CEO compensation package with the characteristics of high uncertainty and long payback periods of IT-based environmental strategic endeavors and the competitive conditions they face.

Underwriter Reputation, CEO Stock Option and IPO Success: Regulatory Focused Framing as Moderators

In this study, I focus on a firm’s framing as a crucial driver of market reaction and investigate its effects on the success of initial public offerings (IPOs). In the past, researchers have focused on the effects of underwriter reputation and those of CEO stock options on IPO performance based on signaling theories. However, these signaling theories have not fully explained firms’ framing of regulatory focus and its effect on IPO performance. Therefore, drawing from the framing effectiveness, regulatory focus, and shareholder value orientation theories, I examine the effects of promotion focused framing and those of prevention focused framing on IPO performance. I hypothesized that underwriter reputation and CEO stock options would strongly affect IPO performance along with the moderating role of promotion focused framing and that of prevention focused framing. Based on a sample of firms that made “first-time commitment” IPOs in the U.S. high-tech industries (472 firms), I have found out that most of my hypotheses were supported. This study offers a set of crucial theoretical and managerial insights on the phenomenon of IPOs.

Still in Control: Information Releases and CEO Stock Options

While regulatory efforts have consistently attempted to limit a CEO’s power to generate self-serving outcomes, we argue that CEOs make use of particular aspects of their position – namely their control over information releases – to generate positive financial gains for themselves. Using the period following the options backdating scandal and the implementation of Sarbanes Oxley, we show that CEOs still receive stock options at suppressed strike prices, that they likely affect those strike prices by releasing negative news in the period before the option grant, and that these releases have a direct impact on the stock price of their firms. We discuss the implications and future research directions indicated by these findings.

Cash Holding in U.S. Firms: Evidence from FAS 123R

Using exogenous variation in CEO stock option grants generated by FAS 123R which mandated expensing of employee stock options, we investigate the causal effects of CEO risk incentives (vega) on cash policies of U.S. firms. Employing a difference-in-difference framework, in which we identify firms most affected by the regulatory change, we find no evidence that changes in CEO portfolio vega lead to significant changes in corporate cash holdings and the marginal value of cash. Our evidence challenges the view that option-based compensation is a first-order driver of corporate cash policy and instead implies that previously documented associations perhaps reflect endogeneity rather than a causal influence.

Managerial Equity Holdings and Income Smoothing Incentives

ABSTRACTWe explore how managerial stock holdings and option holdings affect CEOs' income smoothing incentives. Given the different roles of stock holdings and option holdings in solving agency problems, managers may smooth past earnings using discretionary accruals for the purpose of revealing information to help investors better predict future earnings or for the purpose of hiding volatility of past earnings. We find the association between past smoothing and predictability of future earnings is increasing (decreasing) in CEO stock (option) holdings. Results are consistent with stock holdings aligning the interests of managers and shareholders, and managers using discretionary accruals to smooth past earnings to reveal information to investors about future performance. In contrast, option holdings have been linked with excessive risk taking by managers, and managers use discretionary accruals to mask volatility of less predictable earnings. We demonstrate that income smoothing can be informative or opportunistic, depending on the incentives of CEOs.

What and How the Firm Features Determine CEO Equity-Based Compensation?

The goal of this paper is to check the variables with the highest probability that determine whether firms grants their CEO equity share or stock option awards or not using stepwise logistic regression. Also, how these variables will affect the magnitude of CEO stock option or equity share awards is also included as a significant problem in the next stage of this research paper. The model averaging method is introduced to make the model selection and gives a more precise prediction on the level of stock option or equity share awards to CEO.

CEO Equity-Based Compensation and Goodwill Recognition Using the Purchase Price Allocation Setting

This study examines the relationship between CEO equity based compensation and the amount recognized as goodwill from mergers and acquisitions. CEO stock options grants and options exercised has been chosen to represent the different forms of equity based compensation. Also, the study investigates the effect of CEO characteristics such as gender, age and tenure on goodwill recognition. The researcher uses a sample of 108 public U.S business combinations completed in the service sector between 2002 and 2015. Results of the study indicates that there is no direct relationship between stock option grants and goodwill but CEOs with higher stock options grants in their compensation package recognize more goodwill only if the acquirer stock prices are high. Also, CEOs with higher options exercised in the acquisition announcement year, recognize more goodwill and this relationship becomes stronger when CEO has long tenure. Also, the researcher finds negative relationship between higher representation of CEO male and goodwill recognition الملخص: يهدف هذا البحث الي قياس أثر حوافز المديرين التنفيذين و وبالأخص الحوافز المبنية علي ألاسهم على تحديد قيمة الشهرة بعد الاستحواذ. من أجل تحقيق هذا الهدف سيم اختبار بعض الفروض ، وهي، توجد علاقة ايجابية مباشرة بين علاوة المديرين التنفيذين (خيارات الأسهم) و قيمة الشهرة بعد الاستحواذ، توجد علاقة ايجابية بين خيارات الأسهم و قيمة الشهرة بعد الاستحواذ اذا کان المدير ذو خبرة، توجد علاقة ايجابية بين خيارات الأسهم و قيمة الشهرة بعد الاستحواذ في حال أسعار اسهم الشرکة المستحوذة، يتلاعب المديرين الذکور في رقم الشهرة اکثر من مثيلهم من الإناث. و يعتمد هذا البحث في التحليل على البيانات الثانوية و بصفة أساسية على القوائم المالية للشرکات الأمريکية العامة المسجلة بالبورصة. کما يعتمد بصورة رئيسية على وضع توزيع سعر الشراء(Purchase Price Allocation ) لدراسة النتائج المحاسبية لهذا البحث لأسبادب عديدة. أولا: ان تحديد أسعار الشراء المبني على القيمة العادلة هو موضوع مثير للأهمية في الآونة الاخيرة. ثانيا: يعتبر الاستحواذ من القرارات المميزة الخاصة بالأعمال ذات التأثير طويل المدى على التقارير المالية. وکنتيجة لميزتها الإقتصادية فإن توزيع سعر الشراء يعتبر أداة قوية لتحديد تأثير العوامل المختلفة المؤثرة على التقرير. و يعتبر هذا البحث مهم من الناحية الأکاديمية حيثحداثة الموضوع و قلة الأبحاث و الدراسات التى تناولت هذا الموضوع،اضافة الى التحديات المتعلقة بعقود المکافات الت تواجه الشرکات خاصة بعد الاستحواذ, مما ألقى العبء على المجال الأکاديمى بضرورة تناول هذا الموضوع و ذلک سعيا لتطوير عقود المکافات و زيادة جودة التقارير المالية. و تعد الأهمية الأخرى لهذه الدراسة هي الأهمية العملية والتي تتضح من خلال الدور الذي تلعبه القيمة العادلة بعد عملية الاستحواذ و لذلک تتمثل أهمية هذا البحث فى ضرورة اجراء دراسة ميدانية لتحليل أثر مکافآت المديرين التنفيذين على دقة تحديد القيمة العادلة لأصول الشرکة بعد الاستحواذ. في سبيل تحقيق کل من الأهداف الرئيسية و الأهداف الفرعية لهذه الدراسة و اختبار مدى صحة الفروض الموضوعة ، تم تقسيم البحث إلى عدة مباحث و هي؛ المقدمة والدراسات السابقة، صياغة الفروض، منهجية البحث، نتائجالدراسة التطبيقية، و أخيرا النتائج والتوصيات.

Equity-Based Compensation for Firm Performance

The paper finds evidence that the equity-based compensation is positively related to firm performance and risk-taking. Both stock price and operating performance as well as firm's risk-taking increase with incentives provided by CEO stock options and stock holdings. The pay-performance sensitivity can explain stock returns better as an additional factor to the Fama-French 3-factor model. When CEOs are compensated with the higher PPS, firms experiences the higher return on asset. The higher pay-volatility sensitivity also leads to the higher risk-taking. While CEO incentive compensation has been perceived mixed on its effectiveness, this study provides support to the equity-based CEO compensation in reducing agency conflicts between CEOs and shareholders.

Managerial Equity Holdings and Income Smoothing Incentives

Our study explores how managerial stock holdings and option holdings affect CEOs’ income smoothing incentives. Given the different roles of stock holdings and option holdings in solving agency problems, managers may smooth past earnings using discretionary accruals for the purpose of revealing information to help investors better predict future earnings, or alternatively, for the purpose of hiding volatility of past earnings. We find that the association between past smoothing and predictability of future earnings is increasing (decreasing) in CEO stock (option) holdings. The results are consistent with stock holdings aligning the interests of managers and shareholders, and managers using discretionary accruals to smooth past earnings to reveal information to investors about future performance. In contrast, options holdings have been linked with excessive risk-taking by managers, and managers use discretionary accruals to mask volatility of less predictable earnings. We also document similar effects of CFOs.

CEO option wealth and firm risk-taking: An analysis of multiple reference points

The behavioral agency literature focusing on how CEO stock option gains impact risk taking generates mixed findings, showing positive effect in some studies and negative effect in others. We reconcile this equivocality by introducing the pay reference point which delineates CEO options into both negative and positive deviation contexts. Building on the behavioral agency model and the myopic loss aversion concept derived from the theory of intertemporal preferences we conceptualize how pay reference points of CEO current and future option wealth directly affect risk taking and how bankruptcy likelihood and slack moderate this relationship. We suggest risk taking increases when both option wealth types are in a negative deviation context because CEOs strive to improve performance. In a positive deviation context, current wealth reduces risk taking as CEOs seek to protect their options but future wealth increases risk taking due to a longer option payoff horizon. For CEOs holding current and future option wealth, we argue bankruptcy likelihood weakens and amplifies risk taking respectively in the negative deviation context while slack facilitates risk taking in the positive deviation context. Empirical testing using a manufacturing panel dataset largely supports our hypotheses.

CEOs´ monetary incentives and performance of Mexican firms

This paper analyzes if changes in CEO remuneration and the execution of CEO stock options impact firm performance, under an emerging market context. Data is obtained from 88 non-financial companies listed in the Mexican Stock Exchange (2001-2012). A dynamic panel specification is employed, and regressions are run through the Generalized Method of Moments. Some evidence is found on the negative relationship between flat monetary incentives and Mexican firm performance, specifically for normal times. In addition, financial incentives based on results (particularly CEO stock options) do not imply higher firm performance. Results suggest that companies in particular contexts should move towards the development of CEOs, more than promoting mostly monetary incentives for boosting firm performance. Companies operating in Mexico will gain from hiring intrinsically motivated CEOs, together with testing different extrinsic rewards (neither flat nor stock options) in order to attain additive effects on intrinsic motivation.

Corporate governance, CEO compensation and tax aggressiveness

Purpose The purpose of this paper is to examine the effect of corporate governance structure and CEO compensation on the level of tax aggressiveness. Design/methodology/approach This work analyzes a sample of 471 observations of 100 companies listed on the NASDAQ 100 for the period 2008-2012. It uses a fixed-effect panel model to analyze the effect of different model variables on the tax aggressiveness level. Findings The main finding of this study is the great influence of corporate governance structure and CEO compensation on reducing tax aggressiveness. Indeed, it finds a significant negative relation between board size, CEO salary, CEO stock options and tax aggressiveness. In addition, the study reveals that there is a direct negative relation between CEO duality, tax fees and tax aggressiveness. Research limitations/implications The study was conducted using robust methods to test the effect of corporate governance structure and CEO compensation on tax aggressiveness level. The generalized least squares method was used to fit panel data and overcome heteroscedasticity and autocorrelation problems. The aim of the study was to prove the great effect of both corporate governance structure and CEO compensation on reducing tax aggressiveness. As this study was based on data from American companies, the results cannot be generalized to all contexts. Originality/value This paper differs from previous work and tests the effect of corporate governance structure, CEO compensation, CEO characteristics and audit fees on tax aggressiveness. The findings of this study will enrich the literature on tax aggressiveness by suggesting that corporate governance structure and CEO compensation can significantly limit tax aggressiveness behavior. Therefore, shareholders must be aware of these two variables. They need to limit tax aggressiveness behavior, as it is usually accompanied by rent diversion, as reported by Desai and Dharmapala (2006). Therefore, these findings will be helpful to investors, managers and regulators because they have implications for the interactive decision-making process.

Distracted Shareholders and Corporate Actions

Investor attention matters for corporate actions. Our new identification approach constructs firm-level shareholder "distraction" measures, by exploiting exogenous shocks to unrelated parts of institutional shareholders' portfolios. Firms with "distracted" shareholders are more likely to announce diversifying, value-destroying, acquisitions. They are also more likely to grant opportunistically-timed CEO stock options, more likely to cut dividends, and less likely to fire their CEO for bad performance. Firms with distracted shareholders have abnormally low stock returns. Combined, these patterns are consistent with a model in which the unrelated shock shifts investor attention, leading to a temporary loosening of monitoring constraints.

Are CEOs Held Accountable for Unrecognized Expenses? The Case of Implied Employee Option Expense

An extensive body of research has investigated whether CEOs are held accountable for various earnings components by testing the sensitivity of CEO cash compensation to these earnings components. No study, however, has examined whether CEOs are held accountable for expenses unrecognized in earnings. This study investigates whether CEOs were held accountable for fair value employee stock option (ESO) expense in the period 1996-2005, during which the expense was not recognized, but rather implied by pro forma earnings disclosed in the footnotes under SFAS No. 123. Controlling for CEO stock option grants and other variables, I find that CEO cash compensation decreased with implied fair value ESO expense in the second half of the period 1996-2005 but not in the first half. The result represents the first evidence that CEOs can be held accountable for unrecognized expenses and how boards of directors view an unrecognized expense may be influenced by public opinions (accounting for fair value ESO expense was hotly debated in late 1990s and early 2000s). In high-tech industries, however, the result is very different. In these industries, CEO cash compensation was related to fair value ESO expense in neither the first half nor the second half of the period 1996-2005. The result is unsurprising given the strong position taken publicly by high-tech industry leaders that fair value ESO expense is not an expense to the firm and cannot be measured accurately.

Distracted Shareholders and Corporate Actions

Investor attention matters for corporate actions. Our new identification approach constructs firm-level shareholder distraction measures, by exploiting exogenous shocks to unrelated parts of institutional shareholders' portfolios. Firms with shareholders are more likely to announce diversifying, value-destroying, acquisitions. They are also more likely to grant opportunistically-timed CEO stock options, more likely to cut dividends, and less likely to fire their CEO for bad performance. Firms with distracted shareholders have abnormally low stock returns. Combined, these patterns are consistent with a model in which the unrelated shock shifts investor attention, leading to a temporary loosening of monitoring constraints.

Options Compensation as a Commitment Mechanism in Oligopoly Competition

We analyze how CEO stock options compensation can be used as a commitment device in oligopolistic competition. We develop a two‐stage model where shareholders choose managerial compensation to commit their managers to being aggressive in equilibrium. Our results may explain why some shareholders appear to incentivize ‘excessive’ risk taking through stock options compensation. We analyze how our results are impacted by product quality, marginal cost, product differentiation, and industry concentration. As motivation for our research, we show that there exists positive empirical correlation between industry concentration and options compensation vega within a sample of firms, as suggested by our model. Copyright © 2016 John Wiley & Sons, Ltd.

Corporate Governance and Firm‐specific Stock Price Crashes

AbstractWe investigate whether ownership structure, accounting opacity, board structure & processes and managerial incentives attributes relate to future stock price crash risk. Principal component analysis on the 21 attributes that comprise these four corporate governance dimensions reveals that they can explain between 13.1% and 23.0% of a one standard deviation in crash risk. Transient institutional ownership, CEO stock option incentives and the proportion of directors that hold equity increase crash risk, whilst insiders' ownership, accounting conservatism, board size and the presence of a corporate governance policy mitigate crash risk. Overall these relationships are more pronounced in environments that accentuate agency risk.