Performance-vested stock options and interest alignment |
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| Authors: | Yu Flora Kuang Bo Qin |
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| Institution: | 1. Fisher School of Business, Ohio State University, 840 Fisher Hall, 2100 Neil Ave, Columbus OH 43210, USA;2. W.P. Carey School of Business, Arizona State University, Tempe, AZ 85287, USA;3. John M. Olin School of Business, Washington University, Campus Box 1133, 1 Brookings Dr, St. Louis, MO 63130, USA;1. W.P. Carey School of Business, Arizona State University, Tempe, AZ 85287, USA;2. Robert and Maria Lowden Chair of Finance, Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, USA;3. Samuel S. Stewart, Jr. Presidential Chair in Business, David Eccles School of Business, University of Utah, Salt Lake City, UT 84112, USA;4. Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, USA;1. Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, China;2. Nanyang Business School, Nanyang Technological University, Singapore;3. Fisher College of Business, The Ohio State University, United States |
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| Abstract: | This paper investigates the effects of performance-vested stock options (PVSOs) in aligning management interests and shareholder wealth. Using 4238 executive-level observations for 1383 executive directors from the largest 244 UK non-financial firms over the 1999–2004 period, we find that the use of PVSO schemes in executive compensation contracts is associated with greater interest alignment. The evidence also shows that PVSOs outperform traditional stock options (TSOs) in providing incentives. Moreover, the results suggest that difficult vesting targets negatively affect managers' choice of effort, resulting in the divergence of managers' and shareholders' interests. |
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