The Effect of CEO Option Compensation on the Capital Structure: A Natural Experiment

Financial Management, Vol.45, Issue 4, pages 953-979, 2016

WBS Finance Group Research Paper No.225

Posted: 18 Sep 2014 Last revised: 18 Jan 2022

See all articles by Onur Kemal Tosun

Onur Kemal Tosun

Cardiff Business School - Accounting and Finance Section

Date Written: 2016

Abstract

CEO option compensation and the capital structure decision are simultaneously made choices. Using the Internal Revenue Code 162(m) tax law as an exogenous shock to compensation structure in a natural experiment setting, I can identify firm leverage changes as a result of CEO option compensation changes. The evidence provides strong support for debt agency theory. The results indicate firms decrease leverage when CEOs are paid with more options, and when CEO options become a higher percentage of future cash flows. The findings remain robust after controlling for corporate governance and convertible debt.

Keywords: CEO compensation, Capital Structure, Governance, Natural Experiment, Identification

JEL Classification: G32, J33, C23, C33

Suggested Citation

Tosun, Onur Kemal, The Effect of CEO Option Compensation on the Capital Structure: A Natural Experiment (2016). Financial Management, Vol.45, Issue 4, pages 953-979, 2016, WBS Finance Group Research Paper No.225, Available at SSRN: https://ssrn.com/abstract=2498036 or http://dx.doi.org/10.2139/ssrn.2022354

Onur Kemal Tosun (Contact Author)

Cardiff Business School - Accounting and Finance Section ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

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