Essays on performance-vested stock options and corporate governance

This doctorate project aims to assess the incentive effect of performance-vested stock option (PVSO) in the context of corporate governance and to examine the role of corpo¬rate governance in determining the presence and the level of PVSO awards. We find that performance-vested stock options, conditioning the vesting of stock options on pre¬determined performance target which are generally set rela¬tive to the industry median or peer group, can outperform traditional stock options by better aligning the interests of shareholders and managers. Better interest alignment is consistent with the shareholder wealth maximization model in the Anglo-American markets. Due to intensive public scru¬tiny, corporations with severe principal-agent problems and week corporate governance features will adopt PVSO plans early with the view of reducing agency costs that would have been born by the executives otherwise. However, these early adopters may symbolically employ PVSO plans in order to placate activist investors and alleviate external criticism on the disputative compensation practices. Additional vesting targets in the PVSO plans will sweep off the clouds around performance measurement of senior management by peel¬ing off the macroeconomic and industry level factors, and in turn increase the relevance of reward system. As a conse¬quence, firms with good corporate governance will facilitate the use of PVSOs, and increase the importance of PVSOs in their top managers' pay structure. However, the executives with more controlling power over the board will try various means to get away from PVSOs, given that PVSO impose additional (vesting) targets to executives. While PVSO could promoteenhanced interest alignment between shareholders and executives, stock options could generate considerable risk-taking incentives by providing top managers with lim¬ited downside risk together with unlimited upside potential, especially when the executive pay and wealth is highly sensi¬tive to the firm's stock price volatility. CEO risk-taking incen¬tives stemming from stocks and stock options are captured in the credit rating grades given by rating agencies, which reflect on the overall credit risk of the company concerned. Furthermore, the results suggest the monitoring role of rat¬ing agencies in deterring firms from excessively motivating top management to pursue risky investments