Research

We examine how governance quality and CEO power shape compensation restructuring surrounding FAS 123R's mandatory option expensing. Decomposing responses across timing, magnitude, quality, and policy consequences, we document systematic heterogeneity. Strong governance predicts earlier adjustment and efficient substitution patterns maintaining incentive alignment. CEO power exhibits opposing effects concentrated in the mandatory compliance period: delayed adjustment and rent extraction through non-option compensation increases unrelated to option intensity changes. Causal mediation analysis reveals these restructuring differences transmit to corporate financing policies. Exploiting predetermined governance measures, we provide evidence that both optimal contracting and rent extraction mechanisms operate simultaneously.