Independent legal directors' attitudes toward bank CEO stock option awards

This study examines whether independent legal directors have more conservative attitudes toward bank CEO stock option awards compared to other independent directors. We find that the proportion of legal directors among independent directors is negatively associated with CEO stock option awards as a proportion of both total CEO compensation and total CEO stock-based compensation. Moreover, the negative effect of independent legal directorship on stock option awards is moderated by CEO ownership. Our findings indicate that independent legal directors are less willing to compensate bank CEOs with stock option awards than independent non-legal directors. However, their reluctance toward stock option awards is alleviated when bank CEOs are vulnerable to experiencing a greater wealth loss from risk-taking. Overall, we document that independent legal directors intend to constrain excessive bank risk-taking through restricting CEO stock option awards. It is worth exploring effective oversight mechanisms for bank boards to constrain risk-taking, and this study extends this research stream by revealing a specific channel that can facilitate independent directors to play an important role in overseeing bank risk-taking.