Working Papers, Hanken School of Economics
What Determines Stock Option Contract Design?
() and Matts Rosenberg
Abstract: This paper analyzes factors driving the design of stock
option plans for Finnish firms. We examine determinants of the scope of
plans, exercise price, target group, and dividend protection. The scope is
found to be negatively related to Tobinís Q and positively related to
proxies for monitoring costs. The scope is also greater in broad-based
plans, and in plans with dividend protection. Prior stock return is found
to be negatively related to the size of the premium (out-of-the-moneyness),
whereas dividend protection increases the premium. The results also suggest
that investment intensity, cash flow, and monitoring costs are associated
with the likelihood of granting premium (out-of-the-money) stock options.
Furthermore, the likelihood of granting broad-based plans is increasing in
institutional ownership and cash flow constraints, and decreasing in firm
size. Broad-based plans are also more likely among firms in growth
industries. We find support that the likelihood of dividend protection is
decreasing in foreign ownership. In addition, firms paying zero-dividends
are less likely to include dividend protection, whereas higher unsystematic
risk is associated with a greater likelihood of including dividend
Keywords: Stock option contract design; Optimal contracting; Agency costs; (follow links to similar papers)
44 pages, June 19, 2003
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