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How the Legal System Affects the Equity Mix in Executive Compensation


  • We would like to thank an anonymous referee and seminar participants at the Swedish School of Economics and Business Administration in Helsinki, Finland, at the Global Conference on Business and Economics, and at the annual meetings of the European Finance Association, the European Financial Management Association, and the Financial Management Association for helpful comments and suggestions. We also thank the Research Fellowship Program at Wake Forest University's Babcock Graduate School of Management for partial support of the project. The usual disclaimer applies.


We examine variation in relative use of equity-based compensation (equity mix) across firms from different legal environments by studying 381 non-US firms from 43 countries during the 1996-2000 period. These firms are from countries that provide varying degrees of legal protection for shareholders. The data indicate association between equity mix and the degree of legal protection of shareholder rights. Specifically, firms use relatively more equity-based compensation if in a legal environment where shareholder rights are more strongly protected and where laws are more effectively enforced. These findings add to the literature demonstrating a relationship between institutional factors and financial decisions.