Executive Stock Options Research Articles

Are stock buybacks in hospitality firms associated with outstanding executive stock options?

Purpose Outstanding unexercised stock options can motivate managers to engage in actions that increase the value of their company’s stock, including buying back their firm’s stock. The objective of granting stock options to managers is to align their interests with stockholders by tying a portion of their compensation to the company’s stock performance. However, unexercised stock options may have unintended consequences by providing managers with a vested interest in artificially boosting stock prices via stock buybacks. The primary objective of this research is to study the main factors that influence firms' buyback decisions amongst hospitality firms at a time when these firms were clamoring for taxpayer bailouts. Results from logistic regression seem to suggest that outstanding executive stock options are a major contributory factor in a firm’s buyback decision. Estimates also indicate that larger, more profitable firms will likely engage in stock buybacks. These findings survive a battery of tests.Design/methodology/approach The authors use logistic regression to predict the probability of a firm’s buyback decision based on a given set of exogenous explanatory variables.Findings The paper supports the hypothesis that buyback decisions are guided by the motive to prop support stock prices in the presence of outstanding restricted stock options/warrants granted to firms' executives.Research limitations/implications The paper focuses on the buyback decision of U.S. hospitality firms. The results, therefore, might not be generalizable to firms in other industries or countries.Practical implications U.S. share repurchase corporate policy and government regulation needs to be revisited given the economic imperative for firms to invest in activities to restore employment and put them in a position for economic recovery.Social implications Public criticism of the size, structure and form (i.e. loan vs grant) of COVID-19 bailouts warrants an examination of whether the factors that drive hospitality and tourism firms to repurchase shares support economic recovery.Originality/value Consistent with agency theory, the authors find a significant positive association between outstanding restricted stocks and a firm’s decision to support the stock prices by buying back shares.

Continuous Exercise of Executive Stock Options with Heterogeneous Characteristics

Continuous Exercise of Executive Stock Options with Heterogeneous Characteristics

Analysis of the motivation and impact of the implementation of the employee stock ownership plan

Equity incentive can be divided into executive equity incentive (Executive Stock Option) and employee equity incentive (Employee Stock Option). Employees here refer to the intermediate managers, core technical personnel and other employees except for the senior executives of the company. The ESOP is a mechanism by which the employees of the company share the ownership of the company by holding the stock or options of the company. From the perspective of the implementation of the employee stock ownership plan motivation, its main theoretical basis can be divided into three categories, respectively is incentive theory (incentive theory, reduce agent costs, attract, retain quality employees and limited to financing constraints, reduce cash pressure), signal theory (undervalued company more inclined to internal equity incentives, let investors aware that the current company price relative to its internal value deviation) and major shareholders self-interest theory. From the theoretical point of view, this paper discusses the possible motives and results of domestic listed companies to launch the stock ownership plan, in order to provide theoretical support for small and medium investors to rationally understand the employee stock ownership plan, and provide regulatory suggestions to the regulatory authorities to be vigilant about the self-interest behavior of major shareholders.

The nonlinear relationship between financial constraints and R&D investment: the mediating role of executive stock options

PurposeThe current study aims to investigate the mediating role of executive stock options in the nonlinear relationship between financial constraints and research and development (R&D) investment through two measures of financial constraints.Design/methodology/approachThis study is based on a sample of 90 French firms for the period extending from 2008 to 2020. The authors employ a panel threshold method to analyze whether the impact of financial constraints on R&D investment depends on the level of financial constraints or not.FindingsUsing SA index (Hadlock and Pierce, 2010) and FCP index (Schauer et al., 2019) as measures of financial constraints, the authors demonstrate that the relationship between financial constraints and R&D investment is nonlinear. Moreover, the authors find that executive stock options mediate partially the relationship between financial constraints and R&D investment. More specifically, the authors show that stock options could play two roles depending on the level of the financial constraints; inconsistent mediation for firms with low/medium level of financial constraints and partial mediation for highly constrained firms.Originality/valueThis paper is the first to the best of the authors' knowledge to investigate the nonlinear relationship between financial constraints and R&D investment as well as the mediating role of executive stock option using dynamic panel threshold models.

The effect of optimal investment by stock options incentive under economic policy uncertainty

ABSTRACT This study shows that executive stock options are an effective compensation policy that takes corporate investment to the optimal level in the presence of unpredictable risk from economic policy uncertainty (EPU). We aim to explore whether stock options provide incentives for executives to choose a project that the optimal investment needs to be implemented. We use delta and vega as a proxy for price sensitivity and compensation sensitivity, respectively, to examine the interaction between executive stock options portfolio and EPU. We use delta for price sensitivity and vega for compensation sensitivity, respectively, to examine the interaction between executive stock options portfolio and EPU. Our analysis shows that a well-designed compensation structure motivates executives to maintain the optimal investment level when faced with unpredictable risks.

Replacing executive stock options with share units: A Canadian study

AbstractAre share units a better compensation tool than stock options? This paper studies the impact of a transition within the compensation structures of CEOs of companies listed on the TSX Composite Index. Specifically, we ask whether replacing options with units‐based compensation reduces the volatility of these companies' stock prices while promoting better returns. Our findings show that a shift to share units reduces large‐cap Canadian companies' total risk through its idiosyncratic component. This transition is also accompanied by an increase in their risk‐adjusted accounting and market performance. This suggests that share units are better for compensation contracts.

Executive Reward Structure and Financial Performance of Listed Companies in the Nairobi Securities Exchange, Kenya

Studies have reported positive and significant relationship,that is, positive relationship between executive fixed pay, cash bonus, stock options and company’s financial performance; others negative and significant relationship, while others no significant relationship. In view of4this, the4 study4 sought4 to4 establish4 the4 relationship4 between4 executive4 reward4 structure4 and4 financial4 performance4 of4 listed4 companies4 at4 the4 Nairobi4 Securities4Exchange, Kenya. The investigation's precise goals were to establish the impact of executive base pay, bonuses, and non-cash incentives, as well as executive7 stock7options, on7 the7 financial7 performance7 of7 firms7listed7 on7the Nairobi Securities7Exchange7in7Kenya.The research also determined if the rate of inflation had a moderating influence on the association between CEO compensation and financial performance of Nairobi securities exchange-listed businesses. Stakeholder theory, agency theory, marginal productivity theory, and managerial power and governance theory were all used in this research. In this study, the positivist philosophy was applied, as well as a causal research design. The target population was all 65 listed businesses on the Nairobi Securities Exchange in Kenya, and a census was conducted. The research employed panel secondary data from annual financial statements of NSE-listed businesses. The study finding indicated that all the study variables except for inflation had a positive correlation with with financial performance of listed firms. However it is basic pay, bonuses and non cash benefits that had a positive and significant effect on the financial performance of listed firms. The effect of executive share options was positive but insignificant at 5% level of significance. Equally the effect of inflation was negative but insignificant. However, inflation has a signinificant effect as a moderator in the relationship7 between7 executive7 rewards7 and7 financial7 performance7 of7 listed7 firms7 at7 the7 Nairobi7 Securities7Exchange.Its is on the basis on of this findings that the study recommends that listed firms need to tailor their executive compensation and reward schemes to performance to encourage the top executives to continuous work hard and achieve their performance targets. Keywords: Executive reward structure, executive basic salary, executive bonuses, executive non-cash benefits, executive stock options, inflation rate, financial performance.

Executive stock options, informative stock prices and innovation

Prior studies have not reasonably explained why executive stock options (ESOs) encourage innovation through vega rather than delta. This study re-examines the relationship among vega, delta and innovation performance when stock prices are informative. The findings indicate that informative stock prices amplify the delta effect on encouraging executives to improve innovation performance but that informative prices alleviate the traditional positive effect of vega on innovation. Moreover, when stock prices are informative, deep-in-the-money options reduce the positive effect of delta on innovation, whereas the state control, independent directors and manager and director shareholding enhance (reduce) the positive effect of delta (vega) on innovation. The results hold after conducting robustness tests.

The Role of Share Repurchases for Firms’ Social and Environmental Sustainability

This article embarks on ethical trade-offs at the sustainability/finance interface by contrasting shareholders’ interest in short-term financial returns with society’s interest in counteracting ecological and social grievances. Scrutinizing share repurchases, we investigate a firm’s communicated sustainability orientation (i.e., its environmental and social value orientation) as well as its environmental and social sustainability performance. Our results are based on a large-scale panel dataset of 491 U.S. firms observed from 2004 to 2016. The dataset combines share buyback data with sustainability orientation scores from shareholder letters and sustainability performance ratings. The econometric models suggest no association between social value orientation and repurchase volumes, but a significantly negative relationship between environmental value orientation and buybacks in a cubic form. Executive stock options partially attenuate this relationship. Share repurchases in turn negatively affect future environmental and social performance. This study grasps the consequences of firms’ short-term shareholder satisfaction and discusses its ethical implications in the context of firms’ contribution to sustainable development, thereby providing important insights to the business ethics discourse.

The Differential Impact of Executive Stock Options on Systematic and Idiosyncratic Risk: Evidence From Quasi-Experiment

I investigate whether CEO stock options differentially affect the firm’s systematic and idiosyncratic risk. To examine a causal effect of option compensation on the firm’s systematic and idiosyncratic risk, I exploit the passage of Financial Accounting Standard no. 123R as an exogenous shock to CEO option compensation. According to the Capital Asset Pricing Model (CAPM), only systematic risk is priced since investors can eliminate idiosyncratic risk through diversification. Unlike risk-neutral shareholders, risk￾averse CEOs have limited ability to eliminate idiosyncratic (or firm-specific) risk because since they usually hold large positions in their firms and are often prohibited from hedging the firm-specific risk associated with their compensation. Thus, idiosyncratic risk is unwanted by under-diversified CEOs. Consistent with this idea, I find that, although CEO option compensation is positively associated with the total risk, it is negatively associated with the ratio of idiosyncratic to total risk.

Can the Market Recognize the Value of the Corporate Governance Mechanism of Chinese Listed Companies?-Empirical Evidence From COVID-19.

This paper studies whether the market can recognize the value of corporate governance mechanisms (ownership structure, board structure, and managerial incentives) of Chinese listed companies. We find that when companies are faced with “black swan” events, such as COVID-19, non-state-owned enterprise are found to be more valuable, that is, the stock price of non-state-owned enterprises are more immune to the negative shocks of COVID-19. For board structure, the arrangement of the duality of chairman and CEO is found to be more valuable and can effectively alleviate the negative shocks of the epidemic on the stock price. For managerial incentives mechanisms, it shows that management shareholding, management compensation, and executive stock options are all effective mechanisms and can better withstand the negative shocks of the COVID-19 epidemic on the stock price of companies. This paper sheds light on the value of corporate governance mechanisms in the Chinese capital market from the perspective of investors, which enriches literature in the field of corporate governance.

DARBUOTOJŲ FINANSINIO DALYVAVIMO LIETUVOJE RAIDA IR FORMOS: ĮMONIŲ AKCIJŲ IR PELNO PASIDALIJIMO PROGRAMOS BEI PRIEMONĖS

The article analyses the development of employee financial participation in Lithuania, describes the legal environment of financial participation, and supports this participation. Two methods were used to analyse employee financial participation: 1) the method of logical analysis in examining the internal documents of companies; 2) the qualitative research methods of focus group and semi-structured individual interviews. Theories of the agency and stakeholders were used to analyse the data collected. These theories are usually applied in research in an integrated way, analysing employee financial participation to elucidate the phenomenon of employee ownership, and examining the agent’s performance. It has been established that in Lithuania four employee share ownership programmes and plans usually apply: extensive employee share option programmes (granted to public limited companies whose shares are traded on stock exchanges); granting employee stock options to executives (so-called executive stock option programmes and one-time decisions); stock option programmes in start-ups; and shares granted by shareholders to employees.

Stock options: do they influence dividend payments?

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.

How did the Sarbanes\u2013Oxley Act affect managerial incentives? Evidence from corporate acquisitions

We examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of the Sarbanes–Oxley Act (SOX). Before SOX, equity-based compensation was positively related to changes in risk around acquisition decisions, but this relationship weakened after the introduction of SOX. The drop in post-SOX acquisition-related risk stems from how managers respond to compensation-based incentives in the new regulatory environment. We show that executive stock options and pay-risk sensitivity drive post-SOX managerial responsiveness to risk-taking incentives. We also document a post-SOX value-enhancing effect on long-term stock-price performance and total factor productivity through these same incentive compensation mechanisms. The results are robust to selection bias, simultaneity, measurements of risk, and the definition of incentive compensation.

Executive stock options and systemic risk

Employing a novel control function regression method that accounts for the endogenous matching of banks and executives, we find that equity portfolio vega, the sensitivity of executives’ equity portfolio value to their firms’ stock return volatility, leads to systemic risk that manifests during subsequent economic contractions but not expansions. We further find that vega encourages systemically risky policies, including maintaining lower common equity Tier 1 capital ratios, relying on more run-prone debt financing, and making more procyclical investments. Collectively, our evidence suggests that executives’ incentive-compensation contracts promote systemic risk-taking through banks’ lending, investing, and financing practices.

THE VALUE OF BEING LUCKY: OPTION BACKDATING AND NONDIVERSIFIABLE RISK

The practice of executives influencing their option compensation by setting a grant date retrospectively is known as backdating. Since executive stock options are usually granted at-the-money, selecting an advantageous grant date to coincide with a low stock price will be valuable to an executive. Empirical evidence shows that backdating of executive stock option grants was prevalent, particularly at firms with highly volatile stock prices. Executives who have the opportunity to backdate should take this into account in their valuation. We quantify the value to a risk averse executive of a lucky option grant with strike chosen to coincide with the lowest stock price of the month. We show the ex ante gain to risk averse executives from the ability to backdate increases with both risk aversion and with volatility, and is significant in magnitude. Our model involves valuing the embedded partial American lookback option in a utility indifference setting with key features of risk aversion, inability to diversify and early exercise.

The effects of R&D expenditure and earnings management on stock options: evidence from market competition

This paper examines the effects of R&D expenditures and earnings management on executive stock options and the effects of the competitiveness of a firm in the industry on R&D and executive stock op...

Easy money? Managerial power and the option backdating game revisited

Abstract This paper presents a model of a firm that backdates executive stock option grants in order to maximize actual compensation for a given level of reported compensation. The model is used to estimate the magnitude of the difference between the actual and reported values of option grants. Although the Sarbanes–Oxley Act has reduced the likelihood of very large differentials, it has had a relatively minor impact on the average differential. Misreporting has a greater magnitude, on average, when the share price is more volatile, the options vest earlier or have shorter lifetimes, or there is a longer window in which to grant the options. We analyze more than 36,000 option grants between 2003 and 2019 and find that when recipients have more to gain from strategic backdating, or when there is likely to be less monitoring from independent directors, firms are more likely to exhibit behavior consistent with strategic backdating.

Executive Stock Options and Systemic Risk

Employing a novel control function regression method that accounts for the endogenous matching of banks and executives, we find that equity portfolio vega, the sensitivity of executives' equity portfolio value to their firms' stock return volatility, leads to systemic risk that manifests during subsequent economic contractions, but not expansions. We further find that vega encourages systemically risky policies, including maintaining lower common equity Tier 1 capital ratios, relying on more run-prone debt financing, and making more procyclical investments. Collectively, our evidence suggests that executives' incentive-compensation contracts promote systemic risk-taking through banks' lending, investing, and financing practices.

Fair-value analytical valuation of reset executive stock options consistent with IFRS9 requirements

AbstractExecutive stock options (ESOs) are widely used to reward employees and represent major items of corporate liability. The International Accounting Standards Board IFRS9 financial reporting standard which came into full effect on 1-Jan 2018, along with its Australian implementation AASB9, requires public corporations to report their fair-value cost in financial statements. Reset ESOs are typically issued to re-incentivise employees by allowing the option to be cancelled and re-issued with a lower exercise price or later maturity. We produce a novel analytical Reset ESO valuation consistent with the IFRS9 financial reporting standard incorporating the simultaneous resetting of vesting period, exercise window, reset level and maturity. We allow for voluntary and involuntary exercise. Our analytical result is expressed solely in terms of standardised European binary power option instruments. Using the multi-state mortality model of Hariyanto (2014, Mortality and disability modelling with an application to pricing a reverse mortgage contract, PhD thesis, University of Melbourne), we estimate longitudinal disability and death transition probabilities from cross-sectional data. We determine survival functions for pre-vesting forfeiture or post-vesting involuntary exercise for use with weighted portfolios of our formulae to illustrate the effect of survival on the fair value. We examine the IFRS9 method of valuation using expected time to option exercise and demonstrate a consistent overestimation of fair value of up to 27% for senior executives.