Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design

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Use this URL to link or cite this item: http://hdl.handle.net/10227/182
Title: Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design
Author: Rosenberg, Matts
Contributor: Swedish School of Economics and Business Administration, Department of Finance ansd Statistics, Finance
Belongs to series: Working Papers - 496
ISSN: 0357-4598
ISBN: 951-555-806-9
Abstract: This paper addresses several questions in the compensation literature by examining stock option compensation practices of Finnish firms. First, the results indicate that principal-agent theory succeeds quite well in predicting the use of stock options. Proxies for monitoring costs, growth opportunities, ownership structure, and risk are found to determine the use of incentives consistent with theory. Furthermore, the paper examines whether determinants of stock options targeted to top management differ from determinants of broad-based stock option plans. Some evidence is found that factors driving these two types of incentives differ. Second, the results reveal that systematic risk significantly increases the likelihood that firms adopt stock option plans, whereas total firm risk and unsystematic risk do not seem to affect this decision. Third, the results show that growth opportunities are related to time-dimensional contracting frequency, consistent with the argument that incentive levels deviate more rapidly from optimum in firms with high growth opportunities. Finally, the results suggest that vesting schedules are decreasing in financial leverage, and that contract maturity is decreasing in firm focus. In addition, both vesting schedules and contract maturity tend to be longer in firms involving state ownership.This paper addresses several questions in the compensation literature by examining stock option compensation practices of Finnish firms. First, the results indicate that principal-agent theory succeeds quite well in predicting the use of stock options. Proxies for monitoring costs, growth opportunities, ownership structure, and risk are found to determine the use of incentives consistent with theory. Furthermore, the paper examines whether determinants of stock options targeted to top management differ from determinants of broad-based stock option plans. Some evidence is found that factors driving these two types of incentives differ. Second, the results reveal that systematic risk significantly increases the likelihood that firms adopt stock option plans, whereas total firm risk and unsystematic risk do not seem to affect this decision. Third, the results show that growth opportunities are related to time-dimensional contracting frequency, consistent with the argument that incentive levels deviate more rapidly from optimum in firms with high growth opportunities. Finally, the results suggest that vesting schedules are decreasing in financial leverage, and that contract maturity is decreasing in firm focus. In addition, both vesting schedules and contract maturity tend to be longer in firms involving state ownership.
URI: http://hdl.handle.net/10227/182
URN:ISBN:951-555-806-9
Date: 2003
Copyright information: This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.
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