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The Role of Managerial Stock Option Programs in Governance: Evidence from REIT Stock Repurchases
Author(s) -
Ghosh Chinmoy,
Giambona Erasmo,
Harding John P.,
Sezer Özcan,
Sirmans C.F.
Publication year - 2010
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2009.00251.x
Subject(s) - real estate investment trust , corporate governance , business , stock (firearms) , executive compensation , incentive , stock market , chief executive officer , stock options , restricted stock , non qualified stock option , finance , monetary economics , accounting , economics , real estate , market economy , mechanical engineering , paleontology , management , horse , engineering , biology
This article examines the role of stock option programs and executive holdings of stock options in real estate investment trust (REIT) governance. We study the issue by analyzing how the market reaction to a stock repurchase announcement varies as a function of the individual REIT's governance structure. In particular, we examine how executive and employee stock option holdings influence the market reaction to a firm's announcement of a stock repurchase. Using a sample of REIT repurchase announcements, we find that the market reacts more favorably to announcements by firms where executives have larger option holdings and the chief executive officer is not entrenched. Our results with respect to the roles of stock option holdings of executives and nonexecutives differ from those reported for a cross‐section of non‐REIT firms. While we find evidence supporting the importance of executive stock options in aligning the incentives of management and reinforcing the positive signaling associated with a repurchase announcement, we find little evidence that the market views REIT repurchases as being used primarily to fund option exercise. We attribute these findings to greater dependence by REIT investors on internal governance mechanisms (such as stock option programs) as a result of regulatory restrictions that limit external monitoring such as hostile takeovers.