Options Plans — Some Australian Empirical Evidence

The use of options as a component of executive remuneration in large listed corporations in Australia grew materially between 1997 and 2002. This growth coincided with a significant degree of concentration of ownership of those options in the hands of a small cadre of board members and senior executives. We conclude that this phenomenon, to date essentially unexplored in the literature, has significant implications for the quality of governance outcomes in firms that use options in their incentive and remuneration systems .     

Companies' Modest Claims About the Value of CEO Stock Option Awards

This paper analyzes company disclosures of CEO stock option values in compliance with the SEC's regulations for reporting executive compensation data to stockholders. Companies appear to exploit the flexibility of the regulations to reduce the apparent value of managerial compensation. Companies shorten the expected lives of stock options and unilaterally apply discounts to the Black-Scholes formula. Theoretical support for these adjustments is often thin, and companies universally ignore reasons that the Black-Scholes formula might underestimate the value of executive stock options. The findings not only cast light upon how corporations value executive stock options, but also provide a means of forecasting compliance with controversial new FASB requirements for firms to disclose the compensation expense represented by executive stock options.     

Controlling shareholders’ tunneling and executive compensation: Evidence from China

Conflict of interests between controlling shareholders and minority shareholders could affect executive compensation contracts. In this paper, we use data on Chinese listed companies and show that controlling shareholders’ tunneling reduces the pay-performance sensitivity of executive compensation. These results suggest that while incentive payment schemes are generally adopted in Chinese listed companies, controlling shareholders who obtain private benefits from listed companies have less incentive to strengthen the relationship between executive pay and firm performance.     

Government's Say-on-pay Policy and Corporate Risk-taking: Evidence from China

This paper investigates whether the restriction on executive compensation in Chinese state-owned enterprises (SOEs) imposed by the Government's say-on-pay schemes is conducive to corporate risk taking. Using a sample of listed SOEs over the period 2005–2018, we find that the restriction on executive compensation is negatively associated with corporate risk taking, suggesting that regulatory intervention in executive pay may produce unintended consequences. Our analyses also demonstrate that this negative regulatory effect on corporate risk taking is driven by listed SOEs in the growth stage of the business life cycle and by those in the provinces with a significant degree of government intervention. An additional test shows that the negative effect of the pay restriction on risk taking disappears in the SOEs in which managers hold shares, suggesting that an alignment of interests between managers and other shareholders mitigates the negative effect of the pay restriction. Our finding is robust to a batch of tests to alleviate the concerns about self-selection and reverse causality.     

Who should set CEO pay? The press? Congress? Shareholders?

Populist fervor in an election year has transformed executive compensation from a business issue into a political one. Critics, led by Graef Crystal, author of In Search of Excess: The Overcompensation of American Executives, charge that CEOs are ripping off shareholders with their outrageous salaries while running U.S. corporations into the ground. Politicians claim overpaid CEOs are the root cause of the U.S. competitiveness problem. Add a recessionary business climate to the fact that some CEOs earn 130 times more than their lowest paid employees, and you have the makings of a populist rebellion. In a bid to appease voters, Congress is considering several bills that would limit the deductibility of "excessive executive salaries," the SEC has opened the issue to shareholder comment, and the Financial Accounting Standards Board is looking at new accounting standards for granting stock options to executives as part of company compensation schemes. Andrew R. Brownstein and Morris J. Panner say it's time to put the debate back where it belongs--in a business context. The real question is not are executives paid too much, but are shareholders getting their money's worth. Most U.S. corporations use stock compensation to link company long-term performance to executive salaries. And because of the staggering market performance of U.S. corporations in the 1980s, an overwhelming majority of CEOs are actually paid in line with their performance. Rather than cut executive pay, Brownstein and Panner suggest that corporations extend incentive-based compensation plans to all employees, thus narrowing the salary gap and establishing pay for performance at every level of the organization.     

How Might Companies Value ESOs?

There has been a steady growth in the use of employee equity compensation plans, and in the use of executive stock options (ESOs) in particular, along with a rise in shareholder and public perceptions that the values of compensation plans are not always fully disclosed. The IFSA of Australia recently called for separate reporting in financial statements of numbers and values of ESOs. Companies, when negotiating employment contracts, frequently agree to compensate an executive if a share option plan is subsequently not approved by shareholders. These facts suggest that reporting the value of an ESO plan is a useful and important exercise. We outline a model for the valuation of ESOs typically issued by Australian listed companies and illustrate the application of the model with a case study.     

Executive incentives and payout policy: Empirical evidence from Europe

We investigate how corporate payout policy is influenced by executive incentives, i.e. stock and option holdings, stock option deltas and stock-based pay-performance sensitivity for 1,650 publicly listed firms from the UK, Germany, France, Italy, the Netherlands and Spain, over the period from 2002 to 2009. Our results show that executive stock option holdings and stock option deltas are associated with lower dividend payments in our sample of European countries, where we do not observe any presence of dividend protection for executive stock options. We find that this relationship is mainly driven by exercisable stock options and by options that are in the money. Additionally, we observe that executive stock option holdings and stock option deltas have a negative impact on total payout, suggesting that executives do not substitute share repurchases for dividends. Furthermore, the fraction of share repurchases in total payout increases as executive stock option holdings and stock option deltas increase. Finally, our results show that executive share ownership and stock-based pay-performance sensitivity may mitigate agency conflicts by significantly increasing the level of total payout.     

Corporate governance and chief executive officer dismissal following poor performance: Australian evidence

This paper investigates the association between corporate performance and the probability of chief executive officer (CEO) dismissal for large corporations in Australia. Consistent with prior US and UK studies, corporate performance is negatively related to the probability of CEO dismissal, using both accounting and market‐based performance measures. This paper also investigates whether key corporate governance characteristics affect the likelihood of CEO dismissal, by examining their effect on the strength of the negative association between corporate performance and CEO dismissal. The only significant variable is size of the board. Although its effect is opposite to that hypothesized, this paper provides a plausible explanation. Overall, the results are consistent with shareholder wealth considerations dominating board behaviour in Australia.     

Performance Regularity: A New Class of Executive Compensation Packages

The ability of standard executive stock options to incite managers to adequately select the assets of their firm has been extensively questioned by academics and practitioners. However, very few alternatives exist or have been proposed to better control the investment strategies of top managers. The present article studies the evaluation and sensitivity of a new class of executive stock options well designed for the control of managers. Such packages are aimed at giving incentives to CEOs to maintain a regular performance over time and a stable volatility level. The importance and implications of the choice of the different parameters as well as their robustness with respect to standard financial criteria are examined. In brief, this article studies in a utility-based framework a new type of executive stock options that can be useful to protect and enhance the economic performance of corporations.     

Optimal strike prices of stock options for effort-averse executives

This paper evaluates the common practice of setting the strike prices of executive option plans at-the-money. Hall and Murphy [Hall, Brian, Murphy, Kevin J., 2000. Optimal exercise prices for executive stock options. American Economic Review 90 (2), 209–214] claim this practice to be optimal since it maximizes the sensitivity of compensation to firm performance. However, they do not incorporate effort and the possibility that managers are effort-averse into their model. We revisit this question while explicitly introducing these factors and allowing the reward package to include fixed wages, options, and stock grants. We simulate the manager’s effort choice and compensation as well as the value of shareholders’ equity under alternative compensation schemes, and identify schemes that are optimal. Our simulations indicate that, when abstracting from tax considerations, it is optimal to award managers with options that will most likely be highly valuable (i.e., substantially in-the-money) on their expiration date. Prior to 2006, the tax code and financial reporting standards provided incentives to award options that are closer to the money when issued than the options that were optimal in the absence of these considerations. Recent tax and reporting changes voided these incentives and thus we predict that these changes will induce firms to issue options with lower strike prices than those that were issued prior to 2006.     

股权激励、管理者过度自信与权益资本成本

基于行为金融的视角,从管理者过度自信角度解释了我国股权激励计划实施效果不佳的困惑。实证结果表明,我国实施股权激励计划会在高管过度自信的条件下对上市公司权益资本成本产生影响：股权激励计划的实施提高了上市公司高管过度自信水平;股权激励与高管过度自信的相互作用使得上市公司权益资本成本显著升高。这意味着从管理者过度自信的角度考察股权激励对企业权益资本成本造成的影响,可能会更好地解释股权激励的价值效应。     

Creative compliance in financial reporting

There is significant evidence of the practice of creative accounting by large listed corporations. However, little is known about the process by which such schemes are devised and succeed in escaping legal and regulatory sanction. This study examines this process of creative compliance in the case of complex convertible securities issued by U.K. listed companies between 1987 and 1990. There was an active dialectic of creativity in the design of these instruments — a shift from avoidance to rules to avoidance again. The evidence shows how a small group of professionals in finance, law and accountancy cooperated in the development of these instruments. They helped the issuers to manage their financial reporting process in a way in which compliance was assured. Where regulatees are able to command such creative compliance skills and resources, regulators may find themselves facing an uphill struggle.     

Multiple large shareholders, control contests, and implied cost of equity

In this paper, we examine whether the presence of multiple large shareholders alleviates a firm's agency costs and information asymmetry manifested in the cost of equity financing. Using data for 1165 corporations from 8 East Asian and 13 Western European countries, we find evidence that the implied cost of equity decreases with the presence, number, and voting size of large shareholders beyond the controlling owner. We also find that the identity of the second largest shareholder is important in determining the risk of corporate expropriation in family-controlled firms. Our regional analysis reveals that, mainly in East Asian firms, multiple large shareholders structures exert an internal governance role in curbing private benefits and reducing information asymmetry, perhaps to sidestep deficiencies in the external institutional environment.     

The crowding out effect of booming real estate markets on corporate TFP: evidence from China

This paper explores the impact of housing price appreciation on corporate total factor productivity (TFP) in Chinese A‐share listed corporations. Results show that increasing real estate prices negatively affect corporate TFP. Meanwhile, we find that the deterring effect is especially significant for state‐owned enterprises (SOEs), large corporations and manufacturing corporations. This research further provides suggestive evidence that managerial myopia may be one potential explanation for the crowding out effect of increasing housing prices. When home purchase is under restriction, however, the negative impact of rising housing prices on corporate TFP declines sharply. This study illustrates the efficiency cost of China's booming real estate market.     

高管个人特征与公司税负

以我国上市公司1992～2009年的高管变更及高管个人特征数据为样本,实证分析公司高管个人特征与公司税负之间的关系。研究结果表明,公司高管的变更会显著影响公司税负的大小,且该影响发挥作用的时间具有一定的滞后性。公司高管的任期长短、专业背景等个人特征是影响公司税负的重要因素。     

Risk-taking incentives of executive stock options and the asset substitution problem

Various theoretical models show that managerial compensation schemes can reduce the distortionary effects of financial leverage. There is mixed evidence as to whether highly levered firms offer less stock‐based compensation, a common prediction of such models. Both the theoretical and empirical research, however, have overlooked the leverage provided by executive stock options. In principle, adjusting the exercise prices of executive stock options can mitigate the risk incentive effects of financial leverage. We show that the near‐universal practice of setting option exercise prices near the prevailing stock price at the date of grant effectively undoes most of the effects of financial leverage. In a large cross‐sectional sample of Canadian option‐granting firms, we find evidence that executives' incentives to take equity risk are negatively rather than positively related to the leverage of their employers.     

Executive team heterogeneity,equity pledges,and stock Price crash risk: Evidence from China

Heterogeneous characteristics of executive teams have drawn wide concern as a factor highly related to economic decisions. Using data from 2015 to 2020 among Chinese A-share listed companies, we examine the moderating role played by executive team heterogeneity in the positive impact of controlling shareholder equity pledges on stock crash risk. We find that executive team heterogeneity of overseas background and age reduce the positive impact, while tenure heterogeneity increases the positive impact. Further evidence shows that political connections, ownership property and D&O liability insurance can induce different moderating effects of executive team heterogeneity in the relationship between equity pledges and stock price crash risk. Our study also contributes to helping listed companies effectively manage stock crash risk connected with equity pledges.     

Quality of Corporate Social Responsibility Disclosure and Cost of Equity Capital: Lessons from China

This article explores the relationship between the quality of corporate social responsibility (CSR) disclosure and the cost of equity capital by analyzing the financial data and CSR reports of A-share listed firms in China from 2008 to 2014. The quality of the CSR disclosure is shown to be negatively related to the cost of equity capital of the listed firms. This negative correlation proves to be more prominent among firms of environmentally sensitive industries. Taking the ownership of the listed firms into consideration, it is further confirmed that the negative relationship between the CSR disclosure and the cost of equity capital is of higher significance for state-owned enterprises. Our findings also empirically demonstrate that the quality of CSR disclosure is more negatively related to the cost of equity capital among the large listed firms than the smaller ones.     

股权结构代理成本与外部审计需求

本文基于一个两时点大股东掠夺模型,考察了股权结构、代理成本与外部审计需求之间的关系。我们的模型分析结果表明,第一大股东持股比例与企业价值成U型曲线关系,而与外部审计需求成倒U型曲线关系。即:代理成本较高的上市公司更有可能聘请高质量的外部审计师,以降低代理成本,提高公司市场价值。我们以中国A股上市公司2001和2002年的数据,对上述结论进行了实证检验并得到支持,本文分析还表明,债务融资与外部审计在降低代理成本方面具有相互替代性。     

Positioning codes of ethics on international corporations' websites: A six-year longitudinal study

This research examines the level of international website disclosures of corporate codes of ethics during the period of July 2002 and July 2003, which surrounds the enactment of the Sarbanes-Oxley Act (SOX) in United States. We also gathered similar data from these corporations' websites in April of 2006 through April of 2008 (i.e., three through five years after the effective date of SOX). In April of 2006 (2007 and 2008), 30 (34 and 36) of the 43 corporations listed on the New York Stock Exchange (NYSE) had readily available codes. While not required to have their codes on their corporate websites, 14 (18 and 23) of the 49 corporations that were not listed on the NYSE also had readily available codes. Our research also indicates that corporations headquartered in Europe were more likely to have readily available codes of ethics than corporations headquartered in the Pacific region in 2006 and 2007 but not in 2008.