The effects of employee stock option plans on operating performance in Chinese firms

Hongyan Fang, John R. Nofsinger and Juan Quan

Journal of Banking & Finance, 2015, vol. 54, issue C, 141-159

Abstract: As a part of the ongoing liberalization of the marketplace, Chinese regulators adopted the guideline called “Regulation of Equity Incentive Plans (trial)” to allow firms to provide employee incentives through employee stock option plans. Firms began initiating the plans in 2006. We investigate the impact of these plans on firm performance by comparing option-award firms with similar non-award matching firms. The change in ROE for the option-award firms is significantly higher than the matching firms. This is primarily due to their performance holding up better during the global financial crisis while the matching firms’ performance deteriorates. The stock price of these firms shows a positive reaction to the announcement, but no long-term abnormal returns. The better ROE performance for option-award firms is strong for subsets of the sample that are likely to benefit more from incentivized employees; specifically, privately owned firms, firms with higher board independence, and smaller firms. After various robustness tests, we conclude that the higher performance comes from the employee incentives, rather than earnings manipulation, a replacement of cash compensation, a binding of employees to executives, or gaming vesting periods.

Keywords: ESOPs; Incentive compensation; Ownership structure; Board independence; Option grant (search for similar items in EconPapers)
JEL-codes: G30 G38 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:54:y:2015:i:c:p:141-159

DOI: 10.1016/j.jbankfin.2015.01.010

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