Motives of Stock Option Incentive Design, Ownership, and Inefficient Investment

This paper analyzes the effects of stock option incentives on inefficient investment. Specifically, based on the motive of design, we divide stock option incentives into incentive-driven and welfare-driven incentives. Our research is based on the panel data of 511 Chinese listed companies that declared stock option incentives from 2010 to 2014, including both incentive-driven and welfare-driven incentives. Our research shows that different types of stock option incentives have different effects on inefficient investment. Generally, incentive-driven stock option incentives reduce inefficient investment, whereas welfare-driven stock option incentives do not reduce inefficient investment, but increase it. However, there is a weakening effect in state-owned enterprises due to two opposite factors, numerous restrictions and more self-interested managers. Additionally, the paper provides implications that some stock options are manipulated by managers in the designing stage in order to pursue self-interests, and therefore monitoring abnormal share price movement and performance hurdles is important to safeguard the wealth of shareholders and promote effective motivation for managers.

The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity

As stock-option holdings increase, managers alter their firms’ payout composition, choosing stock repurchases rather than dividends to return cash to shareholders. Prior research presents two competing explanations for this behavior: the flexibility hypothesis and the shareholder power hypothesis. In support of the flexibility hypothesis, I document that this executive stock-option incentive to repurchase stock as a substitute for dividends is stronger when firms have weak shareholder rights and when information asymmetry is severe. In addition, I find that option-induced repurchases are associated with lower shareholder wealth when shareholder rights are weak or when information asymmetry is high. These firms also perform worse in the following year but show higher total payouts to shareholders. Overall, this paper provides a comprehensive picture of managers’ option-driven repurchase behavior.

Executive Compensation And Ownership Structure

The objective of this paper is to highlight the impact of ownership discrepancy and type (managers, families, institutions) on executive compensation.Basedon a sample of French listed firms and using panel data regressions, the results show that capital concentration (Jensen 1986) negatively affects both the level of total executive compensation and the probability of use of stock option incentive plans. This confirms our theoretical alignment hypothesis. Moreover, the results show no evidence of the existence of a significant effect of ownership discrepancy on managerial compensation.Institutional shareholders are likely to encourage the use of stock option incentive plans and managerial ownership positively and significantly influences the level of total and fixed compensation. Family shareholding negatively affects executive compensation variables.