Exploring the relation between family ownership and incentive stock options: The contingency of family leadership, board monitoring and financial crisis

This paper investigates the curvilinear relationship between family ownership and the incentive aim of stock options, considering the effect of family leadership, board monitoring and financial distress. Using Italy as a study setting because of the large number of family businesses, we categorize incentive and rent-extractive stock option plans by their design features. We assume that the co-existence of family and non-family managers expose family firms to underexplored agency problems between owners and managers, and posit that stock options help to mitigate these problems. Our logit model reveals the existence of an inverted U-shaped relationship between family ownership and the incentive aim of stock options that becomes a U-shaped one in family-led firms. We also find that family firms are more likely to grant incentive stock options at low to intermediate level of family ownership in presence of effective board monitoring and during the global financial crisis. This paper contributes to the existing literature on corporate governance and accounting in family businesses, and also has practical significance for investors, regulators and policy-makers.