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

Abstract

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.

Diversified Investment Strategy and the Operation of Internal Capital Market: The Moderating Effect of Corporate Governance Mechanism

“…There are some scholars who provide the positive evidences, for instance, suggesting that the informal links between the chief executive officer and the divisional managers of business groups (e.g., sharing the similar careers, education backgrounds and beliefs) can improve the efficiency of resources allocation and increase the firm value [37]. The basic structure of corporate governance in China roughly accord with the theoretical framework of corporate governance in developed countries, and effective corporate governance can lead to better strategy decision and higher firm value [38]. However, to get more resources from headquarters, divisional managers may increase their bargaining power by engaging in rent-seeking activities [37], [39], [40].…”

“…Generally speaking, the top managers are responsible for the firm development and the behaviors of staff members, and they have a decisive influence on the firm performance. Designing an effective incentive mechanism to encourage them to work hard becomes one of the important issues in corporate governance [15], [38]. Thus, let the top managers hold equity stakes, which will be viewed as a better choice.…”

Pengaruh employee stock option plan (ESOP) terhadap earnings management (studi pada perusahaan yang listed di bursa efek indonesia periode 2015 – 2017)

“…Berbeda dengan penelitian-penelitian di atas, beberapa penelitian terbaru meragukan efektivitas dari insentif ekuitas (Bebchuk & Fried, 2003;Chen et al, 2015;Shan & An, 2018) karena dalam praktiknya dapat menimbulkan serangkaian konflik antara manajer dengan pemegang saham, sehingga mendorong eksekutif terlibat dalam tindakan manajemen untuk mendapatkan keuntungan pribadi. Lebih lanjut, Goldman & Slezak (2006) juga menyatakan bahwa insentif berbasis ekuitas atau opsi saham menggambarkan pedang bermata dua.…”