En analyse af optionsaflønnings værdiskabende effekter for selskaberne i Large Cap

Jens Andersen

Student thesis: Master thesis


This Master Thesis is an analysis of the creation of value for the investors, when stock options are used as a compensation tool to the managements in the Danish Large Cap. A stock option used for compensation have an asymmetric return because it is a right, but not an obligation, to buy a share at a certain price and in a certain period in the future. Legally the companies are bound to give more information about their option programs than other ways of compensation, which makes the accounting costs a little higher. This is not the only legal difference, because stock options and shares also have small tax advantages. As a way of compensation the theoretical advantages of stock options are that their asymmetric return from the share price, both give the management incentive to raise the value of the stock, and make the management less risk averse like the investors usually are. The disadvantages are that the asymmetric return in theory can give the management incentive to make investments where NPV is less than zero, and that it, without a doubt, transfers more risk to the management than other normally used ways of compensation. By lowering this risk transfer, a company’s costs rises, so it is unclear whether this is better. The same kind of dilemma arises, when stock options are compared with other kinds of compensation, because in theory options have desirable incentives the others lack, but also as mentioned before transfer more risk. A questionnaire from people in management, tests that show a rise in volatility, and scandals where stock options get the blame, all makes it most likely that the management focuses more on stock value and becomes less risk averse after stock options are introduced as a way of compensation. Because options are also normally a bonus, which strongly indicates that the management is risk averse even with their high compensation before the granting of stock options, all the theoretical disadvantages and advantages seem to be correct. The remaining question is therefore, whether the advantages outweigh the disadvantages. My own test which compares long periods before and after the option grant using market adjusted returns give inconclusive results, but it also seems like no satisfying way of testing the effects from options in the long run has been found. Most investors and companies in a questionnaire also answer that this is not possible to prove. Despite this fact most of the companies in Large Cap use yearly option programs in addition to other kinds of compensation. 75% of the large Danish investors in a questionnaire are also in favor of this approach, and tests show that companies generally receive a positive reaction from investors when they introduce option programs. In conclusion, there seems to be a stronger indication for than against options to the managements in Large Cap will benefit the investors.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2010
Number of pages82