Manuscript Type: Empirical
Research Question/Issue: We examine the impact of the adoption of deferred share unit (DSU) plans for directors on a firm's stock market value. We also examine the differential response to plan and firm characteristics.
Research Findings/Results: The sample comprises all firms within Canada's top 1,000 that adopted DSU plans between 1997 (first one) and 2005. Results show that adopters exhibit positive abnormal returns at the adoption announcements and that these vary in accordance with DSU attributes: Investors reward firms that adopt stricter standards. Findings also indicate a more positive reaction when firms are widely held, have higher levels of related directors, higher free cash flows, and are not cross-listed in the US.
Theoretical/Implications: The paper adds to the scant literature on directors' compensation by examining a recent development in directors' pay; DSU plans having many distinguishing features that set them apart from stock options. Second, it investigates whether investors' reaction varies with DSU attributes. Third, the specificity of the Canadian settings allows an analysis of the reaction to DSU adoption given different ownership structures and stock market listing.
Practial Implications: The positive stock market reaction to DSU adoption provides valid economic underpinnings to the current worldwide trend in director compensation toward the cancellation of stock option plans and their substitution by DSU. However, the adoption of DSU plans for directors does not add much value in settings where there is already good monitoring by a large shareholder, by a broader investor base or by the board.