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The Impact of Stock-Option Compensation for Outside Directors on Firm Value

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  • Eliezer M. Fich

    (Drexel University)

  • Anil Shivdasani

    (University of North Carolina)

Abstract

We study firms adopting stock-option plans for outside directors in a sample of Fortune 1000 firms from 1997 to 1999. Fixed-effects models accounting for self-selectivity bias indicate that companies with such plans have higher market-to-book ratios and profitability metrics. Option plan adoptions generate positive cumulative abnormal returns (CARs) and favorable revisions in analysts' earnings forecasts. Outside director appointments produce CARs close to zero for firms with option plans but significantly negative CARs for firms without them. We conclude that such stock-option plans help align the incentives of outside directors and shareholders, thereby improving firm value.

Suggested Citation

  • Eliezer M. Fich & Anil Shivdasani, 2005. "The Impact of Stock-Option Compensation for Outside Directors on Firm Value," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2229-2254, November.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2229-2254
    DOI: 10.1086/497048
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