The Equity Mix in Executive Compensation: An Investigation of Cross-Country Differences

Stephen Bryan, Robert Nash, Ajay Patel

Abstract


Why do firms from some countries use no equity in the compensation mix, while others use amounts equivalent to that observed in the U.S.? We examine this issue by investigating compensation data from 381 firms in 43 countries over the 1996 to 2000 period. The data indicate that firms use more equity-based compensation in countries with equity-oriented capital markets and where shareholder rights are strongly protected. After controlling for these country-level macro-factors, we test for how the firm-specific agency costs of debt and equity impact compensation structure. We find that firms with higher growth opportunities (and therefore higher agency costs of equity) and lower risk of default (and therefore lower agency costs of debt) use more equity in the compensation mix. This is consistent with the predictions of contracting theory.


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This work is licensed under a Creative Commons Attribution 4.0 International License.