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Executive Stock Options: Will It Work as a Good Governance Mechanism in all Scenarios?

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  • Singh, Preet Deep
  • Singla, Chitra

Abstract

Agency theory proposes different mechanisms to mitigate agency costs in the firms. An executive stock options (ESoPs) is one of such mechanism, which is given to the CEO of the firm to align CEO’s goals with that of the owners. In this paper, we contend that ESoPs will not work as a good governance or mitigation mechanism in all types of firms. ESoPs can be an effective mitigation mechanism for a firm with dispersed ownership but it might not be the case for a firm with majority or block shareholding. We extend this argument for ESoPs given to board members as well. We present a framework to understand when it makes sense for a firm to incentivise top management with ESoPs.

Suggested Citation

  • Singh, Preet Deep & Singla, Chitra, 2016. "Executive Stock Options: Will It Work as a Good Governance Mechanism in all Scenarios?," IIMA Working Papers WP2016-03-55, Indian Institute of Management Ahmedabad, Research and Publication Department.
    • Handle: RePEc:iim:iimawp:14507
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    1. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-349, June.
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    3. Melissa A. Williams & Ramesh P. Rao, 2006. "CEO Stock Options and Equity Risk Incentives," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(1‐2), pages 26-44, January.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Peter Wright & Mark Kroll & Jeffrey A. Krug & Michael Pettus, 2007. "Influences of top management team incentives on firm risk taking," Strategic Management Journal, Wiley Blackwell, vol. 28(1), pages 81-89, January.
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