Essays on Stock Option Compensation and the Role of Incentives and Risk (summary section only)

Managerial pay-for-performance sensitivity has increased rapidly around the world. Early empirical research showed that pay-for-performance sensitivity resulting from stock ownership and stock options appeared to be quite low during the 1970s and early 1980s in the U.S. However, recent empirical research from the U.S. shows an enormous increase in pay-for-performance sensitivity. The global trend has also reached Finland, where stock options have become a major ingredient of executive compensation. The fact that stock options seem to be an appealing form of remuneration from a theoretical point of view combined with the observation that the use of this compensation form has increased significantly during the recent years, implies that research on the dynamics of stock option compensation is highly relevant for the academic community, as well as for practitioners and regulators. The research questions of the thesis are analyzed in four separate essays. The first essay examines whether stock option compensation practices of Finnish firms are consistent with predictions from principal-agent theory. The second essay explores one of the major puzzles in the compensation literature by studying determinants of stock option contract design. In theory, optimal contract design should vary according to firm characteristics. However, in the U.S., variation in contract design seems to be surprisingly low, a phenomenon generally attributed to tax and accounting considerations. In Finland, however, firms are not subject to stringent contracting restrictions, and the variation in contract design tends, in fact, to be quite substantial. The third essay studies the impact of price- and risk incentives arising from stock option compensation on firm investment. In addition, the essay explores one of the most debated questions in the literature, in particular, the relation between incentives and firm performance. Finally, several strands of literature in both economics and corporate finance hypothesize that economic uncertainty is related to corporate decision-making. Previous research has shown that risk tends to slow down firm investment. In the fourth essay, it is hypothesized that firm risk slows down growth from a more universal perspective. Consistent with this view, it is shown that risk not only tends to slow down firm investment, but also employment growth. Moreover, the essay explores whether the nature of firms’ compensation policies, in particular, whether firms make use of stock option compensation, affects the relation between risk and firm growth. In summary, the four essays contribute to the current understanding of stock options as a form of equity incentives, and how incentives and risk affect corporate decision-making. By this, the thesis promotes the knowledge related to the modern theory of the firm.

A capability-based view of organisational renewal : Combining opportunity- and advantage-seeking growth in large, established European and North American wood-industry companies

The purpose of this study was to extend understanding of how large firms pursuing sustained and profitable growth manage organisational renewal. A multiple-case study was conducted in 27 North American and European wood-industry companies, of which 11 were chosen for closer study. The study combined the organisational-capabilities approach to strategic management with corporate-entrepreneurship thinking. It charted the further development of an identification and classification system for capabilities comprising three dimensions: (i) the dynamism between firm-specific and industry-significant capabilities, (ii) hierarchies of capabilities and capability portfolios, and (iii) their internal structure. Capability building was analysed in the context of the organisational design, the technological systems and the type of resource-bundling process (creating new vs. entrenching existing capabilities). The thesis describes the current capability portfolios and the organisational changes in the case companies. It also clarifies the mechanisms through which companies can influence the balance between knowledge search and the efficiency of knowledge transfer and integration in their daily business activities, and consequently the diversity of their capability portfolio and the breadth and novelty of their product/service range. The largest wood-industry companies of today must develop a seemingly dual strategic focus: they have to combine leading-edge, innovative solutions with cost-efficient, large-scale production. The use of modern technology in production was no longer a primary source of competitiveness in the case companies, but rather belonged to the portfolio of basic capabilities. Knowledge and information management had become an industry imperative, on a par with cost effectiveness. Yet, during the period of this research, the case companies were better in supporting growth in volume of the existing activity than growth through new economic activities. Customer-driven, incremental innovation was preferred over firm-driven innovation through experimentation. The three main constraints on organisational renewal were the lack of slack resources, the aim for lean, centralised designs, and the inward-bound communication climate.

Early growth and adult health: focus on blood pressure, glucose tolerance status and body composition

Theory of developmental origins of adult health and disease proposes that experiences during critical periods of early development may have consequences on health throughout a lifespan. Thesis studies aimed to characterize associations between early growth and some components of the metabolic syndrome cluster. Participants belong to two epidemiological cohorts with data on birth measurements and, for the younger cohort, on serial recordings of weight and height during childhood. They were born as singletons between 1924-33 and 1934-44 in the Helsinki University Central Hospital, and 500 and 2003 of them, respectively, attended clinical studies at the age of 65-75 and 56-70 years, respectively. In the 65-75 year old men and women, the well-known inverse relationship between birth weight and systolic blood pressure (SBP) was confined to people who had established hypertension. Among them a 1-kg increase in birth weight was associated with a 6.4-mmHg (95% CI: 1.0 to 11.9) decrease in SBP. This relationship was further confined to people with the prevailing Pro12Pro polymorphism of the peroxisome proliferator-activated receptor-γ2 (PPARγ2) gene. People with low birth weight were more likely to receive angiotensin-converting enzyme inhibitors/angiotensin-receptor blockers (ACEI/ARB, p=0.03), and, again, this relationship was confined to the carriers of the Pro12Pro (p=0.01 for interaction). These results suggest that the inverse association between birth weight and systolic BP becomes focused in hypertensive people because pathological features of BP regulation, associated with slow fetal growth, become self-perpetuating in adult life. Insulin resistance of the Pro12Pro carriers with low birth weight may interact with the renin-angiotensin system leading to raised BP levels. Habitual physical activity protected men and women who were small at birth, and thus at increased risk for the development of type 2 diabetes, against glucose intolerance more strongly. Among subjects with birth weight ≤3000 g, the odds ratio (OR) for glucose intolerance was 5.2 (95% CI: 2.1 to 13) in those who exercised less than 3 times per week compared to regular exercisers; in those who scored their exercise light compared with moderate exercisers (defined as comparable to brisk walking) the OR was 3.5 (1.5 to 8.2). In the 56-70 year old men a 1 kg increase in birth weight corresponded to a 4.1 kg (95% CI: 3.1 to 5.1) and in women to a 2.9 kg (2.1 to 3.6) increase in adult lean mass. Rapid gain in body mass index (BMI), i.e. crossing from an original BMI percentile to a higher one, before the age of 2 years increased adult lean mass index (LMI, lean mass/height squared) without excess fat accumulation whereas rapid gain in BMI during later childhood, despite the concurrent rise in LMI, resulted in a relatively higher increase in adult body fat mass. These findings illustrate how genes, the environment and their interactions, early growth patterns, and adult lifestyle modify adult health risks which originate from early life.