Stock Option Grants Research Articles

The adoption of stock option plans and their effects on firm performance during Japan’s period of corporate governance reform

This paper empirically investigates the adoption of stock option plans and their effects on firm performance in Japan. Using the sample of the period of corporate governance reform in the 2000s, we find that the adoption of stock option plans was more likely at firms in an industry where many firms had already introduced stock option plans. The result indicates a type of herding behavior among Japanese firms. We further find that firms rushed to grant stock options just before the adoption of the new accounting standard (ASBJ Statement No. 8). Unique to Japan, this standard requires stock option expensing only for newly granted options. We also find that operating performance decreased, but that payout and liquidity ratios remained almost constant after the adoption of stock option plans. Overall, the results do not support the view, at least in the Japanese context, that stock options can function as a primary incentive for improving firm performance.

M&A deal initiation and managerial motivation

This paper contributes to our understanding of managers' motivations for initiating the sale of their company. Using a sample of 1098 publicly-listed US target firms with completed deals, we show that deals initiated by the target firm rather than by outside bidders have higher CEO ownership. Furthermore, CEOs are motivated to offer their firms for sale also by higher golden parachutes, stock and stock option grants prior to takeovers. Our results suggest that motivated CEOs participate actively in deal negotiations, rather than being bribed not to resist the deal. In target-initiated deal firms, CEO ownership and equity grants are also positively correlated with takeover premiums.

DAMPAK STRUKTUR MODAL PADA SENSITIVITAS PENERAPAN KOMPENSASI OPSI SAHAM KARYAWAN TERHADAP KINERJA

This study aims to test whether the management that receive compensation in the form of stock options having an positive impact on company performance. This study considers the external performance measurement by identifying Cumulative Abnormal Return (CAR). In addition, this study aims to test whether the company's capital structure affects the sensitivity level of employee stock option compensation and firm performance. Capital structure is measured with debt to equity ratio. The result indicates that the proportion of Employee Stock Option Plan (ESOP) influence company performance in accordance with the predictions. This shows that the more stock options offered to employees then came a sense of belonging which resulted in more motivated managers to improve company performance. Furthermore, the higher the market performance of companies that can be achieved, the higher the profit (gain) will be obtained by the recipient of stock options. In addition, this study also shows that the impact of stock option grants at the company's performance declined with the greater capital structure of liability. This shows that the capital structure of liabilities will lower the sensitivity level of employee stock option compensation and firm performance. The higher the company's liabilities would reduce the rights of the owner of the dividends each period in accordance with the ownership of shares held since the company must take into account the interest costs to be paid to the creditor.

Tad Folsom and Peloton Industries

Tad Folsom, the newly appointed chair of the audit committee of Peloton Industries, is preparing for his third meeting with the board of directors since being elected to it six months earlier, in July 2010. Bill Pelo, Peloton's CEO, is retiring soon, and the board is eager to have the right management team in place. Folsom is aware that some board members want a drastic change in Peloton's approach to executive compensation and expects input from him. Peloton has never issued stock options before. In general, the practice is not common for medical manufacturing companies, although it is more so in the overall healthcare sector. Folsom remembers his four years as CFO for Healthsource Home Care Inc. (HHC), a multihospital and long-term care system based in the Northwest. HHC had granted stock options as part of its executive compensation package, and Folsom had witnessed several negative changes in behavior as a result. He is eager to avoid similar issues at Peloton while, at the same time, encouraging the adoption of the proper alignment of incentives between management and the shareholders he represents. Excerpt UVA-C-2319 Rev. Nov. 30, 2011 Tad Folsom and Peloton Industries You can attract some amazing talent if the compensation package is strong. Lawton asked for us to consider granting stock options to keep the right management team in place. We need to build strong incentives if we are going to continue to grow. —Peloton Industries Board Member Tina Jeffries Tad Folsom, the newly appointed chair of the audit committee of Peloton Industries (Peloton), had spent most of the four-hour flight from San Francisco to Atlanta reviewing his notes. He was preparing for his third meeting with the board of directors since having been elected to it six months earlier, in July 2010. Bill Pelo, Peloton's CEO, was retiring soon, and the board was eager to have the right management team in place. There had not been much time for Folsom to review the items on the agenda during the week-long medical-imaging conference he had just attended, but he was aware that some board members wanted a drastic change in Peloton's approach to executive compensation and expected input from him. Peloton had never issued stock options before. In general, the practice was not common for medical manufacturing companies, although it was more so in the overall healthcare sector. . . .

Employee Stock Options: Financing Constraints Explanation

Prior literature suggests three explanations for granting stock options as a form of compensation to non-executive employees. Broad-based option grants can be used as an incentives tool, a sorting mechanism, and a means of assisting with employee retention. An alternative explanation is that financially constrained firms use broad-based option grants as a form of self-financing. Using empirical data on broad-based option grants, a financial constraints index and individual variable proxies for financial constraints, we examine the relationship between option grants and the severity of financial constraints to which the firm is subject. We find that direct financial benefits to the firm from the use of option grants are possible. However, sorting is more likely reason for using broad-based option grants, while self-financing is a positive side effect of sorting.

Product-market competitiveness and investor reaction to corporate governance failures

Is industry competition a substitute for the quality of corporate governance? If so, and if self-serving behavior by corporate executives at presumably well governed firms is a greater surprise to investors, then the price reaction to the news of governance failure should vary by the degree of competition prevailing in the firm's industry. For a sample of firms that backdated employee stock options, we find that firms operating in more competitive industries experienced significantly larger wealth declines upon revelation of the news of governance failure (backdating of stock option grants). We interpret our findings to suggest that the quality of corporate governance is less critical for firms operating in more competitive product markets since product market competition acts as an implicit substitute for the performance discipline imposed by high quality of corporate governance.

Do Good Times Breed Cheats? Prosperous Times Have Immediate and Lasting Implications for CEO Misconduct

We examine whether prosperous economic times have both immediate and lasting implications for corporate misconduct among chief executive officers (CEOs). Drawing on research suggesting that prosperous times are associated with excessive risk-taking, overconfidence, and more opportunities to cheat, we first propose that CEOs will be more likely to engage in corporate misconduct during good economic times. Next, we propose that CEOs who begin their careers in prosperous times will be more likely to engage in self-serving corporate misconduct later in their careers. We tested these hypotheses by assembling a large data set of American CEOs and following their stock option reporting patterns between 1996 and 2005. We found that in good economic times, CEOs were more likely to backdate their stock options grants. Moreover, CEOs who began their careers in prosperous times were more likely to backdate stock option grants later in their careers. These findings suggest that the state of the economy can influence current ethical behavior and leave a lasting imprint on the moral proclivities of new workforce entrants.

Are CEOs Held Accountable for Unrecognized Expenses? The Case of Implied Employee Option Expense

An extensive body of research has investigated whether CEOs are held accountable for various earnings components by testing the sensitivity of CEO cash compensation to these earnings components. No study, however, has examined whether CEOs are held accountable for expenses unrecognized in earnings. This study investigates whether CEOs were held accountable for fair value employee stock option (ESO) expense in the period 1996-2005, during which the expense was not recognized, but rather implied by pro forma earnings disclosed in the footnotes under SFAS No. 123. Controlling for CEO stock option grants and other variables, I find that CEO cash compensation decreased with implied fair value ESO expense in the second half of the period 1996-2005 but not in the first half. The result represents the first evidence that CEOs can be held accountable for unrecognized expenses and how boards of directors view an unrecognized expense may be influenced by public opinions (accounting for fair value ESO expense was hotly debated in late 1990s and early 2000s). In high-tech industries, however, the result is very different. In these industries, CEO cash compensation was related to fair value ESO expense in neither the first half nor the second half of the period 1996-2005. The result is unsurprising given the strong position taken publicly by high-tech industry leaders that fair value ESO expense is not an expense to the firm and cannot be measured accurately.

Are Incentive Stock Options Signaling Better Corporate Governance? - An Evidence from Equity Carve-Outs

I analyze the long-run performance and earnings management behavior of equity carve-outs conditioned on whether the executives received incentive stock options at the IPO date. Carve-outs that did not grant incentive stock options subsequently underperform both relative to the overall market and relative to a sample of carve-outs that granted stock options. I show that in absence of incentive stock options, companies adopt more income-increasing Accounting techniques around the IPO. Accruals in years around the IPO explain the cross-sectional variation of the long-run stock market and accounting underperformance. Contrarily, carveouts that grant incentive stock options to their executives at the IPO date do not underperform appropriate benchmarks over three-year period following the IPO and use less aggressive accounting around the IPO. My results point that incentive stock options are signaling better corporate governance to the market that result in better long-run stock market and accounting performance.

Buyback Behaviour and the Option Funding Hypothesis

Payout flexibility from share repurchases enables firms to reduce dilution and funding cost of stock option grants. Using daily repurchase disclosures, we show that U.K. firms use this flexibility to implement (a) large repurchase payouts, (b) with increased frequency, and (c) with lower daily average cost to fund stock options before they are exercisable. This repurchase behaviour is more evident after the adoption of treasury regulation that enabled firms to hold repurchased shares instead of cancelling them. We conclude that repurchase flexibility benefits in funding executive stock options are realised conditional on the option exercisable state.

Executive Stock Options and Earnings Management: A Theoretical and Empirical Analysis

We study the effect of the grants of executive stock options (ESOs) and restricted stock on earnings management and insider trading during the vesting years of these grants. In our theoretical model, an informed manager compensated by stock options is mandated to issue an earnings report. Uninformed investors price the stock based on this report. The manager can manipulate the report to affect the stock price, but earnings management is costly to the manager. The optimal report balances the benefits from exercising stock options and the costs of earnings management. Earnings management and insider trading occur at the vesting date only if the options are in the money post manipulation, and are intensified by larger grants. The model identifies three major determinants of the extent of both earnings management and insider trading: The moneyness of the options at the vesting date, the size of the grants, and cumulative stock returns between the grant date and the vesting date. Our empirical results confirm that the moneyness of newly granted stock options and cumulative stock returns are strongly correlated with both earnings management and insider trading in vesting years. In contrast, the size of the grants is only weakly related to earnings management and insider trading in vesting years.

Recurrent Major Depressive Disorder of a Young Woman.

Questions are presented at “consideration points” that follow a section that gives information about the case. One or more choices may be correct for each question; make your choices on the basis of your clinical knowledge and the history provided. Read all of the options for each question before making any selections. You are given points on a graded scale for the best possible answer(s), and points are deducted for answers that would result in a poor outcome or delay your arriving at the right answer. Answers that have little or no impact receive zero points. At the end of the exercise, you will add up your points to obtain a total score.

Evaluation of Various Methods of Accounting for Employee Stock Options

With development of capital markets and evolution of IT and ITeS companies the trend of granting stock options as part of remuneration package gained usage and importance. This paper deals with the Evolution of Employee Stock Options, various ways of accounting of stock options granted to employees as remuneration and evaluation of such methods of valuation of such stock options, global perspective thereon and the Indian practice.

M&A Deal Initiation and Managerial Motivation

On a sample of 1098 US publicly listed target firms, we show that target initiated deals face potential financial distress and have higher CEO ownership. We further show that CEOs are motivated to offer their firm for sale due to their higher ownership, golden parachutes and stock and stock option grants before the takeover. Moreover, motivated CEOs seem to actively participate in deal negotiations rather than be just bribed not to resit the deal and their ownership and equity grants are positively correlated with premium. This suggests a positive role for deal initiation for target shareholders.

Determinants Of Stock Option Use By Chinese Companies

<p>Using a sample of 225 stock option grants over the period January 2006 to June 2013, we examine the economic determinants of stock option use in Chinese firms from the optimal contract and managerial power approaches. We investigate whether the same economic factors can explain stock option awards to different types of target grantees (including directors and senior executives, technical and business personnel, and special talents introduced in the future). In consistent with the optimal contract theory, we find that the scope of stock option plans is negatively associated with ?rm size, dividend dummy, and three ownership measures (managerial ownership, blockholder ownership, and foreign ownership). Furthermore, we find that the scope of stock option plans is positively related to book-to-market ratio and prior stock returns, but the coefficients are significant only when the stock options awards cover senior managers. We also find that the impact of risk is different when options are targeted to different types of employees. In consistent with the managerial power theory, we ?nd that the scope of stock option plans is inversely related to state ownership. As for the other economic factors, their degree of impact is found to be different across a broad base of employees. In general, ownership variables are more relevant to key technical and business personnel, while firm characteristics variables are more relevant to top management.</p>

SU‐E‐T‐207: Comparison of Integrated Tissue Air Ratio (ITAR) to Traditional TAR for Kilovoltage Pencil‐Beams

Purpose:Clinically viable depth dose determination in kilovoltage pencil‐beams is a great challenge that resulted in a published dosimetry method called ITAR, which involves measurement of air kerma and attenuation with a detector in a low scatter environment coupled with MCNP scatter calculations. The objective of this work is to compare ITAR to traditional TAR using inherently water‐proof microchambers that have only recently become commercially available.Methods:An Exradin A26 microchamber was centered 150 mm from a 100 kVp x‐ray source with 2 mm aluminum HVL. Depth dose in water from 16 to 24 mm in 2 mm increments was determined by: (1) placing blocks of Plastic Water LR near the source to minimize scatter and using previously published conversion coefficients [ITAR method] and (2) submerging the detector in a water tank with 2 mm thick Plastic Water LR walls and jogging the tank with motor controllers while keeping the detector position fixed [traditional TAR method]. Each method was repeated four to five times. For each repetition, dose was measured free in‐air to normalize the data for exponential regression.Results:Traditional TAR indicated higher depth dose than ITAR; differences ranged from 2.1% at 24 mm depth to 2.5% at 16 mm depth. However, the results of traditional TAR did not include a correction for Pq,cham because it is unknown for this detector type in these conditions. It is estimated that the component of Pq,cham due to the effect of water displacement alone is ∼0.94, but Pq,cham is likely several percent larger than 0.94 due to the energy dependency of the microchamber in the presence of low energy scatter that is not present during in‐air calibration.Conclusion:The ITAR method remains preferable for clinical depth dose determination in kilovoltage pencil‐beams due to Pq,cham being unknown for suitable detectors in relevant conditions.All four of the authors are either current full time employees, which include stock option grants, or consultants of Oraya Therapeutics Inc.

Labor Unemployment Risk and CEO Incentive Compensation

In this paper, we investigate the impact of workers’ unemployment risk, a salient attribute of labor market frictions, on the design of CEO incentive compensation. Exploiting state-level changes in unemployment insurance benefits as a source of variation in the unemployment costs faced by workers, we find that, after unemployment insurance benefits increase, boards adjust the compensation structure and provide managers with more stock option grants that result in more convexity payoffs. Such a change is consistent with the view that CEO’s risk-taking incentives are amplified to take advantage of lower unemployment costs. The increase in convexity payoff structures is more pronounced in labor-intensive industries and industries that have higher layoff propensity, but is significantly attenuated when strong labor unions are present. The results are also stronger when CEO wealth is more closely tied to firm performance. Finally, we show that the increase in convexity payoff from option-based compensation induces firms to undertake more risky investments that deliver improved operating performance after the increase in unemployment insurance benefits. These results suggest that firms respond to unemployment risk by changing their risk taking behavior, and one channel through which they do so is executive compensation.

Optimal Contracting Under Mean-Volatility Ambiguity Uncertainties

We present a continuous-time agency model under mean-volatility joint ambiguity uncertainties, where both the principal and agent exhibit Gilboa-Schmeidler's extreme ambiguity aversion. For this, we extend the well-known martingale method for mean-volatility control problems in weak formulation, and show that the second-best contract in general consists of two sharing rules: one for realized outcome and the other for realized volatility. The outcome sharing is for uncertainty sharing and work incentives, and the volatility sharing is to align the agent's worst prior over ambiguity uncertainties with the principal's own. The structure of the optimal contract offers an alternative way of looking at managerial compensation. Unlike the existing standard contracting models, our model implies that the compensation increases with the realized volatility, and that pay-performance sensitivity to the outcome is unrelated to the realized volatility. The positive dependence on the realized volatility is consistent with the frequent executive compensation practices of granting stock options and the empirical evidence of the sharp rise in executive pays during 1990s.

The Value of Being Lucky: Option Backdating and Non-Diversifiable Risk

Empirical evidence shows that backdating of executive stock option grants was prevalent, particularly at firms with highly volatile stock prices. Yet extant Black-Scholes style models used for empirical estimates of gains to executives from backdating suggest that this benefit is not only modest but is greatest for low volatility firms. In this paper we take the stance that, ex ante, executives who have the opportunity to backdate should take this into account in their valuation and 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. This enables us to reconcile theory with empirics - we show the ex ante gain to risk averse executives is significant and increases with volatility. Our explanation hinges on valuing the embedded lookback option, and key features of risk aversion, inability to diversify and American early exercise.

CEO opportunism?: Option grants and stock trades around stock splits

Decades of research confirm that, on average, stock split announcements generate positive abnormal returns. In our sample, 80% of CEO stock option grants are timed to occur on or before the split announcement date. With the average market-adjusted announcement return of 3.1%, awarding the grant before the split announcement results in an average gain per CEO-grant of $451,748. We find additional evidence consistent with timing of CEO stock trading around the split announcement. In the case of CEO stock sales, about two-thirds occur after the split announcement, resulting in an average gain of $345,613.