Abstract
We examine the role of employee stock option plans (ESOPs) in mitigating agency problems in New Zealand firms. We find that ESOPs have a significant and positive effect on firm performance relative to their non-ESOP counterparts. This relation appears within a year from the first ESOP announcement, and for two to four years after the announcement. Our results show that ESOPs improve corporate performance by 10 times the cost of the ESOPs’ adoption in the first year of issue. The improvement persists for four years after the first issuance. These findings confirm the effectiveness of employee stock option plans for companies issuing ESOPs compared with companies that do not issue ESOPs, and show how much the value creation of ESOPs contributes to these firms.
Highlights
Attempts to determine an effective tool of executive compensation that is aligned with the best interests of shareholders have been a long-standing topic of discussion among academicians, researchers, investors, and corporations
To inform about the effectiveness of ESOPs, we address the effectiveness of employee stock option plans among New Zealand firms and how much value ESOPs contribute to their performance
We address whether ESOPs are an effective tool for mitigating the agency problems and how much value ESOPs contribute to the firm
Summary
Attempts to determine an effective tool of executive compensation that is aligned with the best interests of shareholders have been a long-standing topic of discussion among academicians, researchers, investors, and corporations. Executive compensation is recognized as a cashless incentive that reduces the agency problem between shareholders and managers. Shleifer and Vishny (1997) suggest that incentive contracts are related to addressing agency problems in the field of corporate governance. The corporate practice of executive incentives develops into various forms, including share-based schemes and employee stock option plans (ESOPs). ESOPs in New Zealand are not yet broadly implemented, or widely analyzed by researchers. About one-third of New Zealand listed firms prefer to adopt ESOPs to reward their employees. To inform about the effectiveness of ESOPs, we address the effectiveness of employee stock option plans among New Zealand firms and how much value ESOPs contribute to their performance
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