Do Auditors Tolerate Management’s Attempt to Meet Earnings Targets? Evidence from Executive Stock Option Plans in China

The purpose of this paper is to understand the reasons that have led to the use of the stock option plans (SOPs) to reward Spanish CEOs and discuss whether the popularity of this type of incentive can be attributed to the power of the CEO in the Board of Directors. To this end, the study, besides analysing how the level of monitoring and uncertainty influences the use of CEO stock option plans (SOPs) in the 100 firms with the highest stock market capitalisation listed on the Madrid Stock Exchange for the period 1999-2001, it also aims to determine the influence of the level of uncertainty in the design of SOPs. We used both logit models and difference-of-means statistical techniques to analyse the data. The results reveal that 1) the use of SOPs increases as a) the level of monitoring decreases, and b) uncertainty increases; and 2) conventional stock options granted at the money or in the money become more frequent as the uncertainty increases. In light of these results, there is reason to support the approach to the managerial power view and, therefore, to think that in some cases CEOs use SOPs to extract rents from shareholders.Key words: CEO stock options, corporate governance, managerial power (JEL: J33, L21, Ml2, M52)1. IntroductionOver the past decade, the compensation packages of European CEOs have undergone an appreciable change. Stock option plans (SOPs), typical executive compensation systems of English-speaking countries, have rapidly spread throughout Europe. According to the Towers Perrin Consultancy report (2005), between 2001 and 2004, the use of stock options increased by 30% in Italy; 20% in Spain, Japan and Germany; 10% in the Netherlands and 5% in France.As of 2005, the obligation to enter SOPs as expenditure has diminished their use, both in the USA and in Europe. Nevertheless, such changes do not reduce the interest of studying them since SOPs continue to be very popular. In Spain, several studies (Sanchez-Marin & Aragon, 2009; Towers Perrin, 2011) confirm that companies nowadays not only continue to use SOPs to reward their CEOs, but such incentives represent a high proportion of their total compensation.Ironically, this popularity is given when SOPs are criticised by scholars and public opinion because they are costly to shareholders and motivate executives to behave opportunistically (Bebchuk & Fried, 2004; Zhen & Zhou, 2012). Facing the view of the agency theory that considers the SOPs a tool to minimise the agency conflict that exists between CEOs and shareholders, the managerial power theory raises that the executive stock options are mechanisms through which powerful entrenched CEOs extract rent from shareholders without upsetting the public opinion (Bebchuk et al., 2002; Bebchuk & Fried, 2004; Collins et al., 2010).Consequently, based on the approaches of the agency theory and managerial power theory, the aim of this study is to understand the reasons that have led to the use of SOPs as compensation system for Spanish CEOs, and discuss whether their popularity can be attributed to the power of the CEO in the Board of Directors. In order to do so, this study, besides analysing how the monitoring of the Board of Directors and the uncertainty context influence the use the CEO stock option plans (SOPs) in the 100 firms with the highest stock market capitalisation listed on the Madrid Stock Exchange, it also aims to determine the influence of the level of uncertainty in the design of SOPs.Investing this issue in the Spanish context, it is important for the following reasons: First, our study contributes to overcome the shortage of the existing studies in Europe, particularly in Spain. The empirical studies of managerial compensation have almost exclusively focused on the USA context and have used USA data (Fiss, 2006, p. 1013). According to Zattoni (2007), Zattoni & Minichilli (2009), and Festian & Sahkiants (2011), in Europe, there are still very few studies that have analysed the dissemination and characteristics of stock incentives. …

This study investigates the firm specific characteristics which provide ex ante incentives to Australian companies to utilize an executive stock option (ESO) plan. We hypothesize that the remuneration of the Chief Executive Officer, the firm’s investment opportunity set, the level of leverage and the degree of international diversification of the firm are related to the firm’s utilization of an ESO plan. Using a sample of 378 firms drawn from the largest 500 firms in Australia, we find that the results support our hypotheses, with the exception of the level of firm leverage.

Purpose This study aims to investigate whether there is any influence of the option plan to purchase shares protected from dividends to determine the distribution of dividends in Brazilian companies. Design/methodology/approach The authors used a Tobit dynamic and regressive regression model because their sample has an index higher than 30% of companies that do not pay dividends. The sample includes companies that pay dividends or not and pay their executives with executive stock option plans and is composed of 1,990 observations from 356 companies from 2010 to 2016. Findings The results indicated that the presence of a dividend protection clause has a positive association with the distribution of dividends. The authors sought to clarify that companies with a stock option plan protected by the distribution of dividends face fewer restrictions on the distribution of dividends. The authors found that most companies still use only stock options to benefit middle-ranking positions and fit the plan in their remuneration policy. The monitoring of these plans lasts an average of seven years, and specific acquisition conditions are not established with their beneficiaries, who must remain in the company and observe performance metrics. Originality/value This study is relevant because the relationship between dividends and stock options has not yet been analyzed in Brazil, especially concerning a dividend-protected option plan, which is a relatively recent modality, even unknown to some companies.

This paper considers deriving measures for assessing the benefits to firms as a result of granting executive stock option plans. The metrics developed relate to assessing the expected total earnings of the company attributed to executives due to executive stock option award. The paper derives metrics based on number of shares as well as on total value of assets. The values of these metrics can be used to compare and asses the benefits to the company in awarding stock option grants by comparing the metrics with actual realized changes in total earnings. The research work in the paper complements the empirical research of Murphy (1999) and others who found the pay-performance sensitivities due to executive stock option awards. Illustrations of the metrics are carried out to show their properties and in particular for the firm WAL-MART.

The objective of this study is to examine the association of the firm's ownership structure and its investment opportunity set with the adoption of executive stock option plans and the minimum holding period for stock options. This study is carried out in a distinctive institutional environment, where there is a high level of block ownership and significant government ownership in many firms. Based on a sample of 158 publicly listed Singapore firms, the empirical findings indicate that firms with higher managerial ownership are less likely to adopt executive stock option plans and if they do, the minimum holding period is usually set shorter. Firms with higher blockholder ownership tend be less likely to adopt executive stock option plans and would prefer to set a longer waiting period. Government linked companies are more likely to adopt executive stock option plans. Lastly, the greater the growth opportunities, the more likely that the minimum holding period is set longer. This study controls for the effects of firm size, leverage ratio and the regulated industries.

Aktienoptionen haben als Vergütungsbestandteil von Führungskräften in den letzten Jahren auch in Deutschland eine stark zunehmende Verbreitung erfahren. Entwickelt sich der Aktienwert des Unternehmens positiv, erhält die Führungskraft hierdurch ein zusätzliches Entgelt. Liegt der zukünftige Aktienwert jedoch unter dem Basispreis, wird die Führungskraft davon absehen, seine Option zu wandeln, da die Option wertlos ist. Vor dem Hintergrund einer anhaltenden Baisse an den Kapitalmärkten geraten die von den Unternehmen aufgelegten Aktienoptionspläne zunehmend unter Anpassungsdruck. Gegenstand des Beitrags ist es, in einem ersten Schritt die alternativen Anpassungsreaktionen aufzuzeigen. In diesem Zusammenhang wird die Nachverhandlung der Aktienoptionspläne aus vertragstheoretischer Sicht vorgestellt. In einem weiteren Schritt werden die Grenzen des vertragstheoretischen Rahmens aufgezeigt. Als Alternative zur vertragstheoretischen Betrachtung wird die Anreiz-Beitrags-Theorie angesprochen, die im Zusammenhang mit Aktienoptionsplänen bisher nur geringe Beachtung fand.

This paper examines the association between the initialadoption of stock options for senior-level executives and subsequent changes in corporate dividend policy. The primary research hypothesis is that the addition of a stock option to a manager's compensation package provides an incentive for the executive to reduce corporate dividends. This hypothesis follows from the observation that executive stock options are generally not “dividend protected.” The results suggest that dividends are reduced relative to expected dividends. We interpret these results as suggesting that the personal incentives of executives can affect certain aspects of the observed corporate dividend policy.

We introduce a new class of derivative products whose payoff is linked to the trend of the underlying instrument. Many institutional and private investors hold their investments for an extended period of time. The time of buying and selling is generally determined by multiple decision factors and not only by a pure investment analysis requiring an investment to be implemented at a specific point in time. Therefore, with limited flexibility in timing their investment decision, asset managers look for investments that would ideally be independent of the timing decision. Trend derivatives are complex path-dependent instruments whose payoffs are linked to the trend of a stock price or an index, making the timing of the decision less relevant. We show how trend derivatives are designed and priced. Due to their peculiar features, trend derivatives offer some interesting applications such as executive stock option plans.

Both institutional and private investors often have only limited flexibility in timing their investment decision. They look for investments that will ideally be independent of the timing decision. In this article, a new class of derivative products whose payoff is linked to the trend of the underlying instrument is introduced. By linking the trend to the payoff, the timing of the decision becomes less important. Therefore, trend derivatives offer some time‐diversification benefits. How trend derivatives are designed and priced is shown. Due to their peculiar features, trend derivatives offer some interesting applications such as executive stock option plans. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:151–186, 2007

This paper examines the behavior of managerial investment, dividend, and capital structure decisions subsequent to the adoption of stock options as part of the compensation package. Previous studies have documented a positive stock market reaction to changes in incentive compensation plans. The specific changes that such plans induce remain unclear. Surprisingly, firms that increase incentive stock option plans experience earnings declines, on average, relative to their industries. A decline in expenditures on R&D and an increase in selling, general and administrative expenses is also documented.

Tax law changes favoring long-term capital gains have encouraged the use of broad-based as well as executive stock option plans in recent years. Accounting and tax provisions that apply to the two major types of stock option plans, incentive and nonqualified, are important considerations in choosing which plans will best meet the need of particular companies, business units, and individual employees.

This study investigates whether the governance attributes of Brazilian companies are associated with voluntary executive stock option (ESO) disclosure. Results show that Brazilian companies voluntarily disclose very little about their ESO plans, and that board size, presence of a compensation committee, and auditing by a Big 4 firm are significantly related to the degree of voluntary ESO disclosure. We also show that family-controlled companies in Brazil are associated with low voluntary ESO disclosure. Results are robust to a number of specification tests, dependent and explanatory variable measurements, and sample composition. This study has professional and regulatory implications for Brazil and other emerging capital markets. The results underscore the need for stricter rules for executive compensation reporting in Brazil, and they invite policy makers and regulators in emerging markets to consider the effects of company-level governance factors on disclosure incentives.

This study investigates whether the governance attributes of Brazilian companies are associated with voluntary executive stock option (ESO) disclosure. Results show that Brazilian companies voluntarily disclose very little about their ESO plans, and that board size, presence of a compensation committee, and auditing by a Big 4 firm are significantly related to the degree of voluntary ESO disclosure. We also show that family-controlled companies in Brazil are associated with low voluntary ESO disclosure. Results are robust to a number of specification tests, dependent and explanatory variable measurements, and sample composition. This study has professional and regulatory implications for Brazil and other emerging capital markets. The results underscore the need for stricter rules for executive compensation reporting in Brazil, and they invite policy makers and regulators in emerging markets to consider the effects of company-level governance factors on disclosure incentives.

We use unique case study data to analyze the behavior of top managers in an executive stock option plan. We gather questionnaire data on the managers' traits and combine it with exercise data. Managers in our sample expect low volatilities (compared to historical estimates) and are well diversified and modestly risk averse. This implies that the value–cost wedge of options can be smaller than usually assumed. The exercise decisions vary with expected volatility, managerial wealth, and mental accounting. Managers expecting lower volatility exercise earlier. This result is consistent with the predictions of expected utility models using our managers' survey parameters.

The dividend and share repurchase policies of Canadian firms: empirical evidence based on an alternative research design