The Role of Managerial Stock Option Programs in Governance: Evidence from REIT Stock Repurchases |
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Authors: | Chinmoy Ghosh Erasmo Giambona John P Harding Özcan Sezer CF Sirmans |
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Institution: | School of Business, University of Connecticut, Storrs, CT 06269–1041 or .;Finance Group, University of Amsterdam, 1018 WB Amsterdam, The Netherlands or .;School of Business, University of Connecticut, Storrs, CT 06269–1041 or .;Department of Finance, University of Toledo, Toledo, OH 43606–3390 or .;College of Business, Florida State University, Tallahassee, FL 32306–1110 or . |
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Abstract: | This article examines the role of stock option programs and executive holdings of stock options in real estate investment trust (REIT) governance. We study the issue by analyzing how the market reaction to a stock repurchase announcement varies as a function of the individual REIT's governance structure. In particular, we examine how executive and employee stock option holdings influence the market reaction to a firm's announcement of a stock repurchase. Using a sample of REIT repurchase announcements, we find that the market reacts more favorably to announcements by firms where executives have larger option holdings and the chief executive officer is not entrenched. Our results with respect to the roles of stock option holdings of executives and nonexecutives differ from those reported for a cross-section of non-REIT firms. While we find evidence supporting the importance of executive stock options in aligning the incentives of management and reinforcing the positive signaling associated with a repurchase announcement, we find little evidence that the market views REIT repurchases as being used primarily to fund option exercise. We attribute these findings to greater dependence by REIT investors on internal governance mechanisms (such as stock option programs) as a result of regulatory restrictions that limit external monitoring such as hostile takeovers. |
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