Does Ending Stock Option Compensation for Independent Directors Affect Chief Executive Officer Monitoring : A Natural Experiment

AbstractDivergent views exist about the impact of equity-based compensation on monitoring by Non-Executive Directors (NEDs) Prior studies report conflicting results mainly because of the endogeneity problem, which were not addressed or addressed using ineffective techniques. This study attempts to make a meaningful contribution to this debate by using a natural experiment to show that removing share option compensation for NEDs does not weaken the effectiveness of their monitoring; it either improves monitoring, or it has no effect. Our work adds on to the literature that investigates mechanisms to mitigate agency problems, specifically how different forms of compensations improve monitoring by the board. The study shows that it is not worthwhile, for shareholders, to use share option compensation for NEDs. The results are useful to shareholders, as they vote on remuneration policies – including on the different forms of incentives relating to NEDs. compensation for NEDs. They come at a cost