The Impact Of Outside Director Equity Holdings On The Mix Of Outside Director Compensation

Abstract

This study investigates the impact outside director equity holdings have on the determinants of the mix of equity in outside director compensation plans. The analysis, conducted over a 4 year period from 1997-2000, is based on a sample of 89 first time adopters of equity compensation. The use of first time adopters attempts to control for the fact that many of the variables in the study are endogenously determined over time. The results indicate that the mix of equity is negatively associated with outside director holding, positively associated with the market-to-book ratio (a measure of the firms investment opportunities) and negatively associated with return on assets (a measure of CEO bargaining power). These findings suggest that the negotiation that takes place between the CEO and outside directors regarding governance is not only affected by the firms wanting to match the marginal productivity of directors with the opportunities of the firm, but also with the equity holdings of the directors.