Executive Incentives and Capital Structure

Abstract

Through a dynamic panel data analysis of a sample of Nordic firms we investigate how executives stock and option incentives influence the choice of capital structure. In addition, we look at how equity ownership by a large external shareholder influences the incentives effect on capital structure. Our results show that options have a negative effect on debt level, while stock holdings influence is more diffuse. We also see that only options have both a statistical and economical significant impact on leverage, and therefore operate as a stronger incentive than stocks. No significant dependency is found between the size of the largest external shareholder and the incentives effect on capital structure. Still, we see a weak trend indicating that the effect of equity based incentives is stronger when firms largest shareholders are institutional.