Shareholder reactions to the introduction of stock-option programs in swedish companies

Abstract

The background of this research comes from the large debate that has been going on over stock-option programs during the past years and the insignificant amount of research on the issue in Sweden. In light of that corporations adhere to shareholder maximization, we identified several obstacles in achieving this objective in the conflicts of interests, the aversion to risk, and the means of motivation. One of solutions to solve those obstacles is through combining residual returns with residual control, which is also one of the underlying theories of stock-option programs. Because of that the underlying theories of stock option-programs support shareholder maximization, the purpose of the paper was to show that stockholders are positively affected by the introduction of incentive-based contracts.

The overall results of the study showed that the shareholders, on average, perceived the information about introductions of stock option programs as negative. The underlying reason for the results may be seen in the risk for increased salary costs, the implication in measuring performance, the problems with executives who stress a low dividend policy, the commitment implications or in some underlying psychological reasons. Although that the purpose of the paper was to show, given the underlying theories, that shareholders should react positively to the introduction of stock-option programs in companies, our study stressed evidence of the opposite.