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This study investigates the relationship between financial participation plans, that is profit sharing, share plans and option plans, and firm financial performance using…
This study investigates the relationship between financial participation plans, that is profit sharing, share plans and option plans, and firm financial performance using a longitudinal panel data set of non-financial listed companies for the period 1992–2009 comprising 2,216 observations. In addition, it makes a distinction between financial participation plans that are narrow based, directed to top management and executives only, and broad based, targeted to all employees. The panel data also allow us to take into account time lag effects, as profit sharing is usually said to have short-term effects while stock options and share plans are more targeted to longer term impact. Our results show that broad-based profit-sharing plans and combinations of broad-based profit sharing and share plans are positively related with many firm financial performance indicators relative to companies without these plans. However, the results consistently show negative associations between both narrow- and broad-based option plans and firm financial performance.
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.
This paper examines whether the financial performance of the firm is associated with the risk‐taking propensity of executives, which is inferred from the structure of…
This paper examines whether the financial performance of the firm is associated with the risk‐taking propensity of executives, which is inferred from the structure of their share option portfolio. The objective of this paper is to determine if executives have greater risk bearing preferences when they have more share options than shares in their firm. In turn, executives' risk‐taking preferences suggest that these decision‐makers adopt value‐increasing strategies. The results of this study support this notion. The results of the study of 182 Australian firms demonstrate that the negative relationship between firm risk and firm performance is weaker when executives hold a higher proportion of share options than shares in their investment in the firm. These results hold implications for executives' compensation contracts. That is, executives who share in their firms' risk via share options are more likely to undertake risky activities with high‐expected performance outcome.
This chapter examines the determinants of managerial incentives at the time of an Initial Public Offering (IPO) on the Alternative Investment Market (AIM) of the London…
This chapter examines the determinants of managerial incentives at the time of an Initial Public Offering (IPO) on the Alternative Investment Market (AIM) of the London Stock Exchange. We identify a trade-off relation between board monitoring and incentives that is specific to CEOs. We also investigate the role of stock option grants and share transactions at the IPO. We find that the IPO may be used as a wealth diversification opportunity. We report that undiversified managers with large pre-IPO shareholdings receive smaller stock options grants and sell more shares in the IPO than more diversified managers.
One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and…
One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and financial reporting of stock options. In December 2004, the FASB issued Statement 123R, Share‐Based Payment, in the hope that the long process of revising the accounting and financial reporting for stock options will be put to rest. FASB Statement 123R requires the fair‐value‐based method of accounting for share‐based payments. In order to offset the dilutive effects of generous stock option compensation packages for employees, companies are seemingly participating in stock repurchase plans. In the past, stock buyback programs were viewed as a means of distributing excess cash flow to investors; however, it appears now that many companies are financing stock repurchases through the issuance of debt, which can significantly impact the financial flexibility of a company. So, why do companies engage in this behavior? One possible reason for stock buybacks is to reduce the dilutive effect of stock option plans. Companies have, however, disputed that there is a direct relationship between exercised stock options and stock buyback transactions. Nevertheless, several articles and studies have found that there is a relationship and the FASB seems to believe that there is an association between stock buybacks and stock options, as Statement 123R requires that companies disclose the relationship between stock buybacks and stock payment programs. Using a sample of technology firms, we find evidence of an association between exercised stock options and repurchase of stock.
This article investigates the most appropriate accounting treatment for expensing the fair value of employee share options (ESOs) in financial statements. The debate…
This article investigates the most appropriate accounting treatment for expensing the fair value of employee share options (ESOs) in financial statements. The debate centres around whether the grant date or the exercise date is the most appropriate date for determining the value at which the ESOs are eventually accrued within the financial statements. After examining accounting models for each of the above measurement dates, the article concludes that exercise date accounting best reflects the economic substance of the ESO transaction. Therefore, the IASB should consider revising its definition of equity to encompass only existing shareholders, leaving all other financial obligations to be classified as liabilities.
An option is a contract between two parties by which party A grants party B the right to buy from or sell to A, at B's discretion, a given asset at a fixed price until a fixed date after which any rights or obligations expire. The party having the discretionary right to buy or sell is the buyer of the option (in this case, B), and the party granting the right is the seller, or writer, of the option. An option to buy is known as a call option, and an option to sell as a put option. The fixed price specified in the option contract is termed the exercise or striking price, and the fixed date the expiration date. A European option is one which can only be exercised on the date when the option expires; an American option can be exercised at any time up to and including the expiration date. Though there are many different types of underlying asset on which an option could be based, it is options written on ordinary shares quoted on the Stock Market which have been of most interest. This has been greatly enhanced in recent years by the creation of organised markets for options in the main financial centres of the world. The first part of this paper considers the practical aspects of options and the main features of an organised options exchange. The second part of the paper concentrates on introducing option pricing theory in a simplified form. Finally, some of the many and varied possible applications of options and option pricing theory are briefly reviewed.
The purpose of this paper is to solve the optimal managerial compensation problem when shareholders are either naïvely optimistic or rational.
The paper uses applied game theory to derive the optimal CEO compensation package with over optimistic shareholders.
The results suggest that boards of directors should decrease option grants to CEOs when equity is likely to be irrationally overvalued at the date when the CEO's options vest.
The implications of the model are consistent with the available empirical evidence. In addition, the model generates new testable predictions about managerial stock price manipulation, the number of options granted, and the magnitude of the options’ strike prices that have not yet been formally tested.
This is the only paper to derive closed-form solutions to optimal CEO compensation when shareholders are naïvely optimistic.
Incentive‐based executive compensation is regarded as a mechanism for alleviating agency problems between executives and shareholders. Seventy‐three New Zealand (NZ…
Incentive‐based executive compensation is regarded as a mechanism for alleviating agency problems between executives and shareholders. Seventy‐three New Zealand (NZ) listed companies are used to examine the relationship between executive incentive compensation schemes (ICS) and firm performance. The results suggest that neither compensation level nor adoption of an ICS are significantly related to returns to shareholders or ROA. However, there is a statistically significant relationship between Tobin's q and both CEO compensation and executive share ownership. Further, the evidence suggests the recent compensation disclosure requirements in NZ are not yet stringent enough to allow adequate analysis of the link between ICSs and corporate performance.
Purpose – This research studies how the discipline of option-like personal equity portfolio and the market discipline of debt jointly affect executive compensation design.…
Purpose – This research studies how the discipline of option-like personal equity portfolio and the market discipline of debt jointly affect executive compensation design.
Design/methodology/approach – A theoretical model is proposed based on the moral hazard problem of Holmstrom and Milgrom (1987) by integrating firm financial leverage, executive equity holding, and profit-sharing rule. Subsequently, a panel data set of executive compensation is analyzed to provide empirical evidence.
Findings – The discipline of option reduces the need of performance-based compensation. The discipline of debt reduces the use of incentive pay for lowly leveraged firms, but increases the use of incentive pay for highly leveraged firms. These two disciplines can be either complements or substitutes on affecting optimal contracts depending on firm leverage.
Research limitations/implications – The present study provides a starting point for further study of optimal compensation that is not only the conventional one of mainly aligning managerial interests with that of shareholders but also the one of reinforcing the joint discipline of debt and option.
Originality/value – This new perspective produces several results characterizing firms that the discipline of debt and the discipline of option can be either complements or substitutes on affecting incentive compensation design.