Non-Management Director Options, Board Characteristics, and Future Firm Investments and Performance

Posted: 9 May 2004

See all articles by Stephen H. Bryan

Stephen H. Bryan

Wake Forest University

April Klein

New York University (NYU) - Department of Accounting

Multiple version iconThere are 3 versions of this paper

Date Written: May 7, 2004

Abstract

This paper examines if non-management director pay packages are set in ways consistent with the optimal contracting theory. Under this theory, directors issue stock option grants as a means for providing non-management directors incentives to monitor adequately the risk-taking and investment opportunities that managers of the firm undertake. Our results are consistent with this theory. Using a sample of over 5200 observations between 1997 and 2002, we find that (1) agency costs differ substantially across our sample, (2) boards systematically set their compensation contracts to address these agency costs, and (3) significantly positive links exist between the ratio of current stock option grants-to-total compensation and seven future investment, risk and firm performance variables. The investment variables are next period's change in research and development expenditures and change in capital expenditures. The risk variable is next year's stock return volatility. The firm performance variables are next period's Tobin's Q ratio, return on assets (ROA), a market return on current investments, and this period's stock return. Our results are incremental to board characteristics, CEO stock option grants, and economic, firm-specific, yearly, and industry control factors.

Keywords: Director pay, director stock options, performance, investments

JEL Classification: G3

Suggested Citation

Bryan, Stephen H. and Klein, April, Non-Management Director Options, Board Characteristics, and Future Firm Investments and Performance (May 7, 2004). Available at SSRN: https://ssrn.com/abstract=543822

Stephen H. Bryan

Wake Forest University ( email )

7659 Reynolda Station
Winston-Salem, NC 27106
United States
336-758-3671 (Phone)

April Klein (Contact Author)

New York University (NYU) - Department of Accounting ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012
United States

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