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| Author: | Liljeblom, E. Pasternack, D. Rosenberg, M. |
| Title: | What determines stock option contract design? |
| Journal: | Journal of Financial Economics
2011 : NOV, VOL. 102:2, p. 293-316 |
| Index terms: | Finland USA stock options options incentives |
| Language: | eng |
| Abstract: | We analyze the factors driving exercise price policy for executive option plans (ESOPs) and their scope in a country where firms are not subject to the tax and accounting considerations, seemingly the reason behind the dominance of at-the-money options in the US. Our ''unbounded'' data for Finland allow an excellent opportunity to examine whether contract design is consistent with compensation theory. The findings largely support the predictions from the optimal contracting literature. The size of the plan is negatively related to Tobin's Q and firm size and positively related to proxies for monitoring costs, also influencing the likelihood of launching premium ESOPs. The results also imply the premium (out-of-the-moneyness) to be negatively related to previous stock returns and cash flow-to-assets, possibly an indication of high-water mark contracting, or optionally, of managerial power. Also, some support is found for a positive relation between the premium and the vesting period's length when maturity is fixed, indicating an effort to prevent the incentives for management from falling over time. |
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