Incentive effects of performance-vested stock options
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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.