Stock-options and the performance of CAC40 listed companies

Abstract

This paper analyses two main issues: the determinants of the top-executives compensation of the CAC40s' listed firms and the impact of the equity-based compensation on the firm market and accounting performance. Our results show that stock-options grant for CAC40s' top-executives are uncorrelated with its determinants and have no impact on the firm performance over the period of analysis. These results support the theoretical approach of the managerial power and entrenchment. The relationship between firm performance and executive pay has been one of the widely studied issues in the executive compensation literature (Note 1). A substantial theoretical literature develops optimal executive compensation contracts that link pay to firm performance variations as a mean of aligning the incentives of managers (the agents) with the interests of shareholders (the principals). From an empirical view, prior research used a wide variety of methodologies. It provides mixed evidence on the relation between equity-based compensation and firm performance. The stated objectives of almost company stock-options plans are to help the company attract, retain and motivate its executives and other employees. Options help companies attract executives who are higher skilled and relatively less risk-adverse. Options provide retention incentives through a combination of vesting provisions and long option terms. Also, options motivate executives by providing a direct link between company performance and executive wealth, thereby providing incentives for executives to take actions that increase share prices and avoid actions that decrease share prices. Finally, in addition to these stated objectives, conveying compensation in the form of stock-options rather than cash allows companies to conserve cash while reducing reported accounting expense (Note 2) and allows recipients to defer taxable income until exercise or even later. Our paper presents empirical evidence on the relationship between executive compensation and firm performance of the CAC40 (Note 3) listed companies. It is exploratory that executive compensation is ultimately part of a simultaneous system that determines the corporation's value and the allocation of that value among various claimants. Our main results show that the compensation of the French top-executives is not correlated with its economic and financial determinants such as firm performance and firm size. We also find that executives' equity-based pay has no impact on their companies market and accounting performance. The remaining of the paper is organized as follows. Section 2 of the paper presents a theoretical and empirical literature review about executive compensation and firm performance. Section 3 develops the hypothesis and the empirical methodology used in this paper. In section 4, we describe the data used in this paper and discuss endogenous and exogenous variables of the model. The empirical results and their interpretation are presented in section 5 while section 6 summarizes the key findings. 2. Literature review Empirical studies on stock options can be divided into two broad categories. The first one focuses on the impact of stock options on financial and investment decisions. The second deals with the relationship between stock-options and performance. The next two subsections review the above-mentioned categories of empirical studies on stock options. 2.1 Stock-options and financial and investment decisions The main works studying the stock-options and financial and investment decisions have assessed the impact of stock options on financial risk, investment choice and dividend policy, respectively. The study of Agrawal and Mandelker (1987) focuses on 209 American companies that have made acquisitions between 1974 and 1982. The authors examine the relationship between shares and stock-options ownership and the