Why more restricted stocks, less stock options?--An explanation based on the preference of regulators of China?

Abstract

This paper provides an empirical explanation of the more frequent use of restricted stock plans for executives than stock option plans, to reveal the determinants of a restricted stock plan and understand its subsequent effects. We find that firms with higher growth opportunity, smaller size, higher executive ownership, smaller rent-seeking probably, and dividend payment prefer to grant restricted stock plans. Moreover, the preference of regulators drives the tendency of using restricted stock plans, designed to have higher pay-performance sensitivity (delta) and lower pay-risk sensitivity (vega). Under the intensive regulation, the restricted stock plans designed by firms with executive ownerships and large agency debt costs are more sensitive to risk. As a result, granting restricted stock plans rather than stock options helps improve firm performance and the preference of regulators on restricted stock plans can also enhance firm performance and decrease firm risks.