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Article
Publication date: 29 October 2020

TianLong Ma and Huiping Zhang

This study aims to disclose how the nature of corporate ownership, stock efficiency and wage level affect the optimal proportion of employee stock.

Abstract

Purpose

This study aims to disclose how the nature of corporate ownership, stock efficiency and wage level affect the optimal proportion of employee stock.

Design/methodology/approach

This paper studies three duopoly markets: two private enterprises, two state-owned enterprises (SOEs) and a private enterprise and an SOE. The competitions between the two parties are taken as a two-stage dynamic sequential game and studied through back-induction.

Findings

The results reveal that the enterprise ownership has a directly bearing on the optimal proportion of employee stock and determines whether to implement the employee stock ownership plan (ESOP) and the specific level of the plan. The optimal proportion of employee stock is positively correlated with its contribution to enterprise efficiency. There are many influencing factors on the effect of wage level on the optimal proportion of employee stock, namely, the ownership nature of ESOP implementer and efficiency difference of different nature stocks.

Social implications

The results of this study provide policy recommendations for companies preparing to implement ESOP.

Originality/value

The research findings provide policy implications for enterprises to prepare a suitable ESOP and the reform of national equities, especially the mixed-ownership reform in China.

Details

Journal of Organizational Change Management, vol. 33 no. 6
Type: Research Article
ISSN: 0953-4814

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Article
Publication date: 1 March 2006

Glenn Boyle, Stefan Clyne and Helen Roberts

From 2007, New Zealand firms must report the cost of granting employee stock options (ESOs). Market‐based option pricing models assume that option holders are…

Abstract

From 2007, New Zealand firms must report the cost of granting employee stock options (ESOs). Market‐based option pricing models assume that option holders are unconstrained in their portfolio choices and thus are indifferent to the specific risk of any firm. By contrast, ESO holders are frequently required to hold portfolios that are over‐exposed to the firm that employs them and so adopt exercise policies that reflect their individual risk preferences. Applying the model of Ingersoll (2006) to hypothetical ESOs, we show that ESO cost can be extremely sensitive to employee characteristics of risk aversion and under‐diversification. This result casts doubt on the usefulness of any market‐based model for pricing ESOs, since such models, by definition, produce option values that are independent of employee characteristics. By limiting employee discretion over the choice of exercise date, vesting restrictions help reduce the magnitude of this problem.

Details

Pacific Accounting Review, vol. 18 no. 1
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that…

Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

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Book part
Publication date: 27 February 2009

Mukesh Bajaj, Sumon Mazumdar, Vikram Nanda and Rahul Surana

It is widely believed that contrary to standard asset allocation theory, employees irrationally hold concentrated investments in company stock in their 401(k) plans thus…

Abstract

It is widely believed that contrary to standard asset allocation theory, employees irrationally hold concentrated investments in company stock in their 401(k) plans thus bearing firm-specific risk that could otherwise have been diversified away (see e.g., Benartzi, 2001). However, in measuring any such lack of diversification costs, a unique tax benefit associated with such investments (available to those who choose the Net Unrealized Appreciation (NUA) strategy) has been hitherto ignored. We analyze an employee's optimal allocation of retirement assets among alternative investments, including company stock, in the presence of the NUA tax benefit. The employee has a standard power utility function and seeks to maximize expected utility from her after-tax wealth upon retirement. Based on simulations, we find that, even when company stock is stochastically dominated by investments in the market index, the employee will allocate a non-trivial part of her retirement funds to company stock for a wide range of parameter values. Consistent with empirical evidence, the allocation to company stock is greater for employees closer to retirement and when the company's stock has experienced substantial gain in value.

Details

Research in Finance
Type: Book
ISBN: 978-1-84855-447-4

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Book part
Publication date: 1 May 2012

Andrew H. Chen and John W. Kensinger

Although employee stock ownership may result in increased cash flows due to enhanced organizational productivity or improved governance, this benefit is counterbalanced by…

Abstract

Although employee stock ownership may result in increased cash flows due to enhanced organizational productivity or improved governance, this benefit is counterbalanced by the increased risk premium due to a higher correlation between the returns to the firm and the returns to human capital in general. For corporations that employ people with commonplace skills, employee stock ownership results in increased systematic risk, so the optimal level of employee stock ownership is small. When skills are unique, however (so the returns have low correlation with the returns to human capital in general), the optimal level of employee stock ownership is high, with strong incentives for outsourcing – not just the routine easily repeatable tasks but also research, product development, and other highly specialized tasks requiring knowledge not present within the firm. These conclusions hold even without conflicts of interest between owners and employees, but are strengthened in the presence of such conflicts. Incentives for greater employee ownership are further strengthened by the higher costs of becoming or remaining a public corporation that have been imposed by the Sarbanes–Oxley Act of 2002. This analysis provides a framework for optimizing employee incentives from stock ownership.

Details

Research in Finance
Type: Book
ISBN: 978-1-78052-752-9

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Book part
Publication date: 27 February 2009

Melanie Cao and Jason Wei

Starting from 2003, Microsoft and many other companies have either gradually reduced or completely replaced stock options with restricted stocks in their compensation…

Abstract

Starting from 2003, Microsoft and many other companies have either gradually reduced or completely replaced stock options with restricted stocks in their compensation plans. This raises an interesting question: which form of compensation is better, stock or options? This chapter makes an economic comparison between the two compensation vehicles and concludes that stock is preferred to options. The backdrop of the study is dynamic asset allocation within a utility maximization framework whereby the company may go bankrupt. The incorporation of bankruptcy risk into the analysis is motivated by the recent downfalls of companies such as Enron and WorldCom.

We demonstrate that vesting requirements and bankruptcy risk can lead to significant value discounts. When the restricted stock and options have a vesting period of 5 years, and account for 50% of the total wealth, the total discount is more than 60%, out of which 20% is due to bankruptcy risk. More importantly, we find that stock is a better compensation tool than options. For a given dollar amount of grant, the higher the stock proportion, the higher the expected utility. In fact, replacing options by stock can lead to a substantial amount of cost savings for the firm, while maintaining the same level of utility for the employee. For example, when options account for 50% of the total wealth and are subsequently replaced by stock, the granting cost is reduced by about 60%. Our findings therefore provide a theoretical support for the move to stock-only style of performance compensations.

Details

Research in Finance
Type: Book
ISBN: 978-1-84855-447-4

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Article
Publication date: 1 May 1983

In the last four years, since Volume I of this Bibliography first appeared, there has been an explosion of literature in all the main functional areas of business. This…

Abstract

In the last four years, since Volume I of this Bibliography first appeared, there has been an explosion of literature in all the main functional areas of business. This wealth of material poses problems for the researcher in management studies — and, of course, for the librarian: uncovering what has been written in any one area is not an easy task. This volume aims to help the librarian and the researcher overcome some of the immediate problems of identification of material. It is an annotated bibliography of management, drawing on the wide variety of literature produced by MCB University Press. Over the last four years, MCB University Press has produced an extensive range of books and serial publications covering most of the established and many of the developing areas of management. This volume, in conjunction with Volume I, provides a guide to all the material published so far.

Details

Management Decision, vol. 21 no. 5
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 December 2004

Michael Nwogugu

This paper analyzes economic, legal, behavioral and public policy issues pertaining to the accounting for employee stock options. The paper explains why employee stock

Abstract

This paper analyzes economic, legal, behavioral and public policy issues pertaining to the accounting for employee stock options. The paper explains why employee stock options (ESOs) are superior to other forms of incentive compensation, why ESOs in their present form are inefficient and why particular accounting, legal and tax treatments will provide the optimal results for the economy, the government, management/employees and shareholders. The issues discussed in this article are relevant in ESO accounting, regulation of ESOs, incentive compensation, human resources analysis, tax policy, corporate governance, fraud, valuation of companies, derivatives regulation, behavioral analysis of law/rules, portfolio management and management strategy.

Details

Managerial Auditing Journal, vol. 19 no. 9
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 February 1988

Overview All organisations are, in one sense or another, involved in operations; an activity implying transformation or transfer. The major portion of the body of

Abstract

Overview All organisations are, in one sense or another, involved in operations; an activity implying transformation or transfer. The major portion of the body of knowledge concerning operations relates to production in manufacturing industry but, increasingly, similar problems are to be found confronting managers in service industry. It is only in the last decade or so that new technology, involving, in particular, the computer, has encouraged an integrated view to be taken of the total business. This has led to greater recognition being given to the strategic potential of the operations function. In order to provide greater insight into operations a number of classifications have been proposed. One of these, which places operations into categories termed factory, job shop, mass service and professional service, is examined. The elements of operations management are introduced under the headings of product, plant, process, procedures and people.

Details

Management Decision, vol. 26 no. 2
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 14 October 2013

Hongyan Fang and David Whidbee

– The purpose of this paper is to provide evidence in support of incentive and retention-based explanations for backdating.

Abstract

Purpose

The purpose of this paper is to provide evidence in support of incentive and retention-based explanations for backdating.

Design/methodology/approach

The authors use matching-firm techniques and the bivariate logistic model.

Findings

Backdating firms tend to be younger and faster growing – the characteristics of firms with growing demand for skilled labor. Further, rather than experiencing poor performance, backdating firms tend to outperform matching firms in both prior- and post-backdating years.

Originality/value

The results suggest that backdating reflects a firm's demand for valuable employees rather than strictly a manifestation of agency problems, as evidenced by previous study.

Details

Managerial Finance, vol. 39 no. 11
Type: Research Article
ISSN: 0307-4358

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