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

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http://urn.fi/URN:ISBN:951-555-806-9
Julkaisun nimi: Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design
Tekijä: Rosenberg, Matts
Muu tekijä: Swedish School of Economics and Business Administration, Department of Finance ansd Statistics, Finance
Svenska handelshögskolan, Institutionen för finansiell ekonomi och ekonomisk statistik, finansiell ekonomi
Julkaisija: Swedish School of Economics and Business Administration
Päiväys: 2003
Kieli: eng
Sivumäärä: 1837 bytes
Kuuluu julkaisusarjaan: Working Papers - 496
ISBN: 951-555-806-9
ISSN: 0357-4598
URI: http://hdl.handle.net/10227/182
http://urn.fi/URN:ISBN:951-555-806-9
Tiivistelmä: 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.
Avainsanat: stock option incentives
principal-agent theory
contract design
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