Extract Or Not Extract? The Effect of Familism on Stock Option Plans

Abstract

There is an ongoing debate in managerial literature regarding the aim of stock option plans (SOPs). In this paper we analyse whether and to what extent the family involvement in ownership and managerial positions affects the use of SOPs as tools to extract rents. By examining a sample of plans issued by Italian listed firms, we classify the SOPs according to their characteristics (i.e. vesting period, lock-up, strike price, market index) and identify three different clusters namely Rent SOPs, Non-Rent SOPs, Hybrid. After controlling for CEO family, board size, equity owned by minority shareholders, and other firm-specific characteristics, we find that family firms are less likely to adopt SOPs for rent extraction purpose. We also find that SOPs specifically granted to family members are less likely to pursue rent extraction goals. Our findings are robust against different specifications of family firms. This paper offers important theoretical contributions to management research and insightful policy implications for all family owned listed firms.

Alignment vs rent-extraction effects of stock options. A conceptual model

“…Similar conclusions are drawn for the lock-up period (Arena et al , 2016; Bernhardt, 1999; Healy and Palepu, 2002; European Corporate Governance Forum, 2009; Fudenberg et al , 1990; Peng and Roell, 2008; Zattoni, 2007). Indeed, some authors in this tradition interpret the lack of any lock-up period for beneficiaries in connection with rent-extractive effects (Bebchuk et al , 2002; Hoi and Robin, 2004).…”

“…It consists in the settlement of a new strike price when the market stock value drops beyond the original exercise price. As a consequences, it provides executives with unlimited gains when the market share price increases, and limited losses if the stock price decreases (Arena et al , 2016). Indeed, the component of SO design under consideration is associated with a decline of financial performance detrimental for shareholders, thus supporting the rent-extraction effect hypothesis of these compensation tools (Daily et al , 2003).…”