Essays on Executive Compensation
My dissertation focuses on the incentives from executive stock and stock option ownership, how these incentives affect the welfare of firms’ different stakeholders, and how these stakeholders respond. In the first chapter, I investigate whether CEO stock and stock option ownership affects firms’ cost of public debt financing. I find that CEO stock ownership reduces firms’ borrowing cost in the public capital market, but the more interesting finding is regarding stock options. Specifically, CEO stock option ownership increases firms’ borrowing cost if the CEO’s option portfolio has a highly convex payoff structure and the reverse is true if the payoff structure of the CEO’s option portfolio is close to linear. These results highlight the importance of differentiating among stock options based on the convexity of their payoff structures. The second chapter of the dissertation examines the role that CEO stock and stock option ownership plays in firms’ choice between debt financing and equity financing. I find support for the hypothesis that in order to enhance the value of their option portfolios, CEOs with a higher sensitivity of wealth to stock return volatility are more likely to choose debt financing over equity financing, even if the latter is in the best interest of shareholders. The implication is that rather than aligning the interests of shareholders and managers, stock options create an agency problem which results in CEOs pursuing suboptimal financing policy and capital structure. In the third chapter, I examine how the presence of commercial-banker directors at non-financial companies affects these firms’ CEO compensation policy. I find that bankers on boards have significantly negative effects on the level of CEO equity incentives, and the effect is stronger at firms with higher stock return volatility, when banker directors sit on smaller boards, and when banker directors have been on the boards for at least four years. These results support the conjecture that the conflict of interest between commercial-banker directors and shareholders at non-financial firms induces these directors to lower the sensitivity of CEO wealth to shareholder value.