Restructuring decisions and executive stock options in financially distressed firms

Agency theory indicates that management ownership might reduce the conflict of interests between managers and stockholders. Several studies have supported the argument that executive compensation plans can motive executives to enhance firm performance and maintaining profit. This paper examines whether the compensation of executives through stock options influences the firm's restructuring or liquidation decisions. The findings suggest that, the higher equity incentive and the lower the value of executive stock option in executives' compensation plan, the more restucturing decisions the executive will make, even when these choices could accelerate the firm's failure. Nevertheless, there is only weak evidence that replacing the executive will increase the likelihood of restructuring decisions over liquidation decisions when the firm is facing financial distress.