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Should managers be incentivized with stock or options? Evidence from China

Fang Chen, Jianjun Jia, Yuen Lin and George Xiang

Pacific-Basin Finance Journal, 2022, vol. 75, issue C

Abstract: Which type of managerial compensation—stock or options—is more effective as an incentive to maximize shareholder value and curb excessive risk-taking has been debated often in the literature. By investigating the stock and option grants by Chinese firms from 2005 to 2015, we find that higher past stock return volatility increases the preference for stock over options, while a significant upward trend in stock price results in a tendency to choose options over stock. Both stock and option grants as forms of managerial compensation lead to better financial performance, with no significant difference. We present evidence to exclude earnings management as the source of improvement in financial performance. Firms using stock as compensation exhibit higher productivity than those using options. In contrast, there is no improvement in managerial ability from using either stock or options as compensation. Our study deepens the understanding of the relationship between the composition of managerial compensation and firm performance.

Keywords: Equity-based compensation; Restricted stock; Stock options (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.pacfin.2022.101842

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Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

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