Working Papers, Hanken School of Economics
Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design
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.
Keywords: Stock option incentives; Principal-agent theory; Contract design; (follow links to similar papers)
45 pages, August 1, 2003
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