The use of equity grants to manage optimal equity incentive levels

We predict and find that firms use annual grants of options and restricted stock to CEOs to manage the optimal level of equity incentives. We model op timal equity incentive levels for CEOs, and use the residuals from this mod el to measure deviations between CEOs' holdings of equity incentives and op timal levels. We find that grants of new incentives from options and restri cted stock are negatively related to these deviations. Overall, our evidenc e suggests that firms set optimal equity incentive levels and grant new equ ity incentives in a manner that is consistent with economic theory. (C) 199 9 Elsevier Science B.V. All rights reserved.