Abstract
We develop a dynamic trade‐off model of managerial discretion to investigate how stock option compensation relates to managers' intertwined capital structure and dynamic investment decisions. Our model predicts that option grants provide
managers with incentives to undertake both current and future investments, in sharp contrast to the effects of stock compensation. With an increase in option compensation, managers in low‐ (high‐) risk firms tend to increase (decrease) firm leverage, while the opposite is true when stock pay increases. This result offers an innovative prospective on the empirical tests of the relationship between option
compensation and capital structure.
managers with incentives to undertake both current and future investments, in sharp contrast to the effects of stock compensation. With an increase in option compensation, managers in low‐ (high‐) risk firms tend to increase (decrease) firm leverage, while the opposite is true when stock pay increases. This result offers an innovative prospective on the empirical tests of the relationship between option
compensation and capital structure.
| Original language | English |
|---|---|
| Pages (from-to) | 2422-2445 |
| Number of pages | 24 |
| Journal | European Financial Management |
| Volume | 30 |
| Issue number | 4 |
| Early online date | 20 Jan 2024 |
| DOIs | |
| Publication status | Published - Sept 2024 |
Funding
We would like to acknowledge the helpful comments and feedback from the anonymous referee and the editor John Doukas, which helped us improve the paper. The research presented in this paper was supported by the National Natural Science Foundation of China (Project No. 72201277 and 72161016), the Fundamental Research Funds for the Central Universities, Zhongnan University of Economics and Law (Project No. 2722023BY006).
Keywords
- capital structure
- dynamic investment
- option compensation