Are CEOs Charged for Stock-Based Pay? An Instrumental Variable Analysis

Using instrumental variables approach, this paper investigates whether an increase in stockbased compensation for CEOs is associated with a reduction in the dollar value of all other CEO compensation, as agency theory would suggest. I find that, on the contrary, larger stock-based compensation is on average accompanied by larger other components of CEO compensation. Similar results are obtained when focusing on option grants alone. The analysis of the compensation practices in corporations that have voluntarily started to include option grants into income statements shows little support for the hypothesis that accounting methods affect the use of options in CEO compensation. ∗Acknowledgements: I am especially grateful to my dissertation committee chair Siddhartha Chib for providing valuable guidance. I also appreciate the valuable comments of Ted Day, Shane Johnson, Todd Milbourn, and seminar participants in Texas Lone Star conference in Houston, 2005.