Investment Opportunities and the Relation Between Equity Value and Employees’ Bonus

Chih‐Ying Chen

Journal of Business Finance & Accounting, 2003, vol. 30, issue 7‐8, 941-974

Abstract: A sample of firms where employee stock options and other long‐term incentives are absent but an annual bonus is required is examined. A positive relation is found between firm equity value and stock bonus but not cash bonus. The positive relation is stronger when the firm has greater investment opportunities. Additionally, the relation is shown to be nonlinear in the sense that the marginal effect of stock bonus on equity value is positive but decreasing (negative) when the stock bonus is below (above) the breakpoint. Overall, the annual stock bonus is valued positively by investors even though it is linked to the firm's contemporaneous but not future performance.

Date: 2003
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