[PDF] Stock Options Managerial Incentives And Capital Structure eBook

Author : Jouahn Nam
Publisher :
Page : pages
File Size : 14,68 MB
Release : 2003
Category :
ISBN :

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In this study we use estimates of the sensitivities of managers' portfolios to stock return volatility and stock price to directly test the relationship between managerial incentives to bear risk and two important corporate decisions. We find that as the sensitivity of managers' stock option portfolios to stock return volatility increases firms tend to choose higher debt ratios and make higher levels of Ramp;D investment. These results are even stronger in a sub sample of firms with relatively low outside monitoring. For these firms managerial incentives to bear risk play a particularly pivotal role in determining leverage and Ramp;D investment.

Author : Katharina Lewellen
Publisher :
Page : 66 pages
File Size : 42,37 MB
Release : 2003
Category : Corporations
ISBN :

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This paper studies the impact of financing decisions onrisk-averse managers. Leverage raises stock volatility, driving a wedge between the cost of debt to shareholders and the cost to undiversified, risk-averse managers. I quantify these "volatility costs" of debt and examine their impact on financing decisions. The paper finds: (1) the volatility costs of debt can be large, particularly if the CEO owns in-the-money options; (2) higher option ownership tends to increase, not decrease, the volatility costs of debt; (3) a stock price increase typically reduces managerial preference for leverage, consistent with prior evidence on security issues. Empirically, I estimate the volatility costs of debt for a large sample of U.S. firms and test whether these costs affect financing decisions. I find evidence that volatility costs affect both the level of and short-term changes in debt. Further, a profit model of security issues suggests that managerial preferences help explain a firm's choice between debt and equity. Keywords: Executive Compensation, Stock Options, Risk Incentives, Leverage. JEL Classifications: G3, G32, M52.

Author : Harry DeAngelo
Publisher : Now Publishers Inc
Page : 215 pages
File Size : 19,62 MB
Release : 2009
Category : Corporations
ISBN : 1601982046

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Corporate Payout Policy synthesizes the academic research on payout policy and explains "how much, when, and how". That is (i) the overall value of payouts over the life of the enterprise, (ii) the time profile of a firm's payouts across periods, and (iii) the form of those payouts. The authors conclude that today's theory does a good job of explaining the general features of corporate payout policies, but some important gaps remain. So while our emphasis is to clarify "what we know" about payout policy, the authors also identify a number of interesting unresolved questions for future research. Corporate Payout Policy discusses potential influences on corporate payout policy including managerial use of payouts to signal future earnings to outside investors, individuals' behavioral biases that lead to sentiment-based demands for distributions, the desire of large block stockholders to maintain corporate control, and personal tax incentives to defer payouts. The authors highlight four important "carry-away" points: the literature's focus on whether repurchases will (or should) drive out dividends is misplaced because it implicitly assumes that a single payout vehicle is optimal; extant empirical evidence is strongly incompatible with the notion that the primary purpose of dividends is to signal managers' views of future earnings to outside investors; over-confidence on the part of managers is potentially a first-order determinant of payout policy because it induces them to over-retain resources to invest in dubious projects and so behavioral biases may, in fact, turn out to be more important than agency costs in explaining why investors pressure firms to accelerate payouts; the influence of controlling stockholders on payout policy --- particularly in non-U.S. firms, where controlling stockholders are common --- is a promising area for future research. Corporate Payout Policy is required reading for both researchers and practitioners interested in understanding this central topic in corporate finance and governance.

Author : Hernan Ortiz-Molina
Publisher :
Page : pages
File Size : 37,69 MB
Release : 2006
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I examine how CEO compensation is related to firms' capital structures. My tests address the simultaneity of these decisions and distinguish between debt types with different theoretical implications for managerial incentives. Pay-performance sensitivity decreases in straight-debt leverage, but is higher in firms with convertible debt. Furthermore, stock option policy is the component of CEO pay that is most sensitive to differences in capital structure. The results strongly support the hypothesis that firms trade-off shareholder-manager incentive alignment in order to mitigate shareholder-bondholder conflicts of interest. The hypothesis that debt reduces manager-shareholder conflicts can explain some but not all of the results.

Author : Kyonghee Kim
Publisher :
Page : 51 pages
File Size : 16,24 MB
Release : 2018
Category :
ISBN :

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While extensive research examines the relation between option incentives in executive compensation and risk-taking by managers, the impact of capital structure on this relationship has received little empirical attention. Prior work suggests that heightened managerial career concerns arising from financial risk and monitoring by debt holders will result in leverage having a dampening effect on the relation between managerial risk-taking and equity-linked incentives. We empirically evaluate this contention and find leverage significantly weakens the positive relation between option incentives in flow compensation and managerial risk-taking. These results hold after accounting for the endogeneity of both, firm leverage and incentive compensation decisions. The attenuating effect holds for both short-term and long-term components of debt but is stronger for the short-term component. Overall, the results highlight the influence of capital structure on the relationship between option incentives and managerial risk-taking.

Author : Harold Demsetz
Publisher : Cambridge University Press
Page : 196 pages
File Size : 27,21 MB
Release : 1997
Category : Business & Economics
ISBN : 9780521588652

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The essays in this volume discuss the theory of the business firm and its applications in economics.

Author : Tom Nohel
Publisher :
Page : 42 pages
File Size : 19,71 MB
Release : 2002
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We examine the effect of stock options on managerial incentives to invest. Our chief innovation is a model wherein firm value and executive decisions are endogenous. Numerical solutions to our model show that managerial incentives to invest are multi-dimensional and highly sensitive to option strike prices, the manager's wealth, degree of diversification, risk aversion, and career concerns. We find that over-investment problems are far more likely and far more severe than many researchers suggest. Finally, firm value is not a strictly increasing function of a manager's incentive compensation or conventional pay-for-performance metrics. Stronger managerial incentives to invest can benefit or harm a firm. Our results should send a cautionary signal to researchers who study managerial behavior. It is not sufficient to rely on one-dimensional risk-neutral valuation metrics, such as pay-for-performance, to describe the degree of incentive alignment between managers and shareholders.

Author : Lorenzo Casavecchia
Publisher :
Page : pages
File Size : 10,17 MB
Release : 2017
Category :
ISBN :

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In this study, we show that the option-like structure of equity-based compensation encourages managerial risk-taking and provide new evidence on the way in which CEO's risk-taking could manifest itself in a multi-segment firm. Our results show that a greater sensitivity of managerial compensation to shareholder wealth -- as proxied by CEO's portfolio vega -- leads to greater risk-taking through active capital allocation. We then analyze the impact of risk-taking on shareholder wealth and demonstrate that risk-taking is positively associated with future stock returns. Overall, this article contributes to the literature by providing evidence that equity-based compensation does actually promote the alignment of interests between shareholders and managers.