Incentive effects of performance-vested stock options

Y. Kuang

Research output: PhD ThesisPhD Thesis - Research external, graduation externalAcademic

Abstract

The vesting of traditional stock options (TSOs) only depends on the passage of time and managerial compensation might merely reflect price increases in a rising market. As a reform on traditional stock option plans, performance targets have been introduced as a condition for option vesting. The use of performance-vested stock options (PVSOs) has been advocated as in line with "best corporate governance practice" and have been implemented rapidly, especially in high-profile companies. Little is known, however, about their implications on managerial behavior.

This dissertation investigates the effects of PVSOs in motivating managers to promote shareholder value. Undesired consequences associated with PVSOs are also examined. Chapter 2 studies the effectiveness of PVSOs in aligning interests between managers and shareholders. Chapter 3 explores managers' propensity to engage in earnings management when PVSOs are used in compensation. In an agency setting, Chapter 4 compares the incentive effects of PVSOs with TSOs in inducing managerial effort. Chapters 2 and 3 illustrate two sides of one coin: option vesting targets incentivize managers to work in the shareholders' best interest but at the same time, these targets also provide managers with incentive to manage earnings. Incorporating the effects of earnings management into the analysis, Chapter 4 shows positive net effects of PVSOs in motivating managers. More specifically, with appropriately defined performance targets, PVSOs will still induce higher economic effort from managers than TSOs.
Original languageUndefined/Unknown
QualificationPhD
Awarding Institution
  • Tilburg University
Supervisors/Advisors
  • van Lent, L.A.G.M, Supervisor, External person
  • Suijs, J.P.M., Co-supervisor, External person
Award date30 Oct 2007
Place of PublicationTilburg
Publisher
Publication statusPublished - 2007

Bibliographical note

Naam instelling promotie: Tilburg University
Naam instelling onderzoek: Tilburg University

Cite this

Kuang, Y. (2007). Incentive effects of performance-vested stock options. Tilburg: Tilburg University.
Kuang, Y.. / Incentive effects of performance-vested stock options. Tilburg : Tilburg University, 2007.
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title = "Incentive effects of performance-vested stock options",
abstract = "The vesting of traditional stock options (TSOs) only depends on the passage of time and managerial compensation might merely reflect price increases in a rising market. As a reform on traditional stock option plans, performance targets have been introduced as a condition for option vesting. The use of performance-vested stock options (PVSOs) has been advocated as in line with {"}best corporate governance practice{"} and have been implemented rapidly, especially in high-profile companies. Little is known, however, about their implications on managerial behavior.This dissertation investigates the effects of PVSOs in motivating managers to promote shareholder value. Undesired consequences associated with PVSOs are also examined. Chapter 2 studies the effectiveness of PVSOs in aligning interests between managers and shareholders. Chapter 3 explores managers' propensity to engage in earnings management when PVSOs are used in compensation. In an agency setting, Chapter 4 compares the incentive effects of PVSOs with TSOs in inducing managerial effort. Chapters 2 and 3 illustrate two sides of one coin: option vesting targets incentivize managers to work in the shareholders' best interest but at the same time, these targets also provide managers with incentive to manage earnings. Incorporating the effects of earnings management into the analysis, Chapter 4 shows positive net effects of PVSOs in motivating managers. More specifically, with appropriately defined performance targets, PVSOs will still induce higher economic effort from managers than TSOs.",
author = "Y. Kuang",
note = "Naam instelling promotie: Tilburg University Naam instelling onderzoek: Tilburg University",
year = "2007",
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publisher = "Tilburg University",
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}

Kuang, Y 2007, 'Incentive effects of performance-vested stock options', PhD, Tilburg University, Tilburg.

Incentive effects of performance-vested stock options. / Kuang, Y.

Tilburg : Tilburg University, 2007.

Research output: PhD ThesisPhD Thesis - Research external, graduation externalAcademic

TY - THES

T1 - Incentive effects of performance-vested stock options

AU - Kuang, Y.

N1 - Naam instelling promotie: Tilburg University Naam instelling onderzoek: Tilburg University

PY - 2007

Y1 - 2007

N2 - The vesting of traditional stock options (TSOs) only depends on the passage of time and managerial compensation might merely reflect price increases in a rising market. As a reform on traditional stock option plans, performance targets have been introduced as a condition for option vesting. The use of performance-vested stock options (PVSOs) has been advocated as in line with "best corporate governance practice" and have been implemented rapidly, especially in high-profile companies. Little is known, however, about their implications on managerial behavior.This dissertation investigates the effects of PVSOs in motivating managers to promote shareholder value. Undesired consequences associated with PVSOs are also examined. Chapter 2 studies the effectiveness of PVSOs in aligning interests between managers and shareholders. Chapter 3 explores managers' propensity to engage in earnings management when PVSOs are used in compensation. In an agency setting, Chapter 4 compares the incentive effects of PVSOs with TSOs in inducing managerial effort. Chapters 2 and 3 illustrate two sides of one coin: option vesting targets incentivize managers to work in the shareholders' best interest but at the same time, these targets also provide managers with incentive to manage earnings. Incorporating the effects of earnings management into the analysis, Chapter 4 shows positive net effects of PVSOs in motivating managers. More specifically, with appropriately defined performance targets, PVSOs will still induce higher economic effort from managers than TSOs.

AB - The vesting of traditional stock options (TSOs) only depends on the passage of time and managerial compensation might merely reflect price increases in a rising market. As a reform on traditional stock option plans, performance targets have been introduced as a condition for option vesting. The use of performance-vested stock options (PVSOs) has been advocated as in line with "best corporate governance practice" and have been implemented rapidly, especially in high-profile companies. Little is known, however, about their implications on managerial behavior.This dissertation investigates the effects of PVSOs in motivating managers to promote shareholder value. Undesired consequences associated with PVSOs are also examined. Chapter 2 studies the effectiveness of PVSOs in aligning interests between managers and shareholders. Chapter 3 explores managers' propensity to engage in earnings management when PVSOs are used in compensation. In an agency setting, Chapter 4 compares the incentive effects of PVSOs with TSOs in inducing managerial effort. Chapters 2 and 3 illustrate two sides of one coin: option vesting targets incentivize managers to work in the shareholders' best interest but at the same time, these targets also provide managers with incentive to manage earnings. Incorporating the effects of earnings management into the analysis, Chapter 4 shows positive net effects of PVSOs in motivating managers. More specifically, with appropriately defined performance targets, PVSOs will still induce higher economic effort from managers than TSOs.

M3 - PhD Thesis - Research external, graduation external

PB - Tilburg University

CY - Tilburg

ER -

Kuang Y. Incentive effects of performance-vested stock options. Tilburg: Tilburg University, 2007.