[An Analysis of the Effectiveness of Stock Option incentive System: Case study of Chinese List companies on London Stock Exchange]

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Table of Contents

ABSTRACT5

CHAPTER 1: INTRODUCTION6

CHAPTER 2: LITERATURE REVIEW11

Review from Previous Studies11

Variable remuneration: concept11

The call option12

Advantages and disadvantages of the use of stock options13

The agency theory13

Performance Meter14

Retains and attracts talent for key positions in companies15

Definition of Share-Based Compensation21

Types22

Use22

Advantages22

Disadvantages23

Firm performance, Executive stock options and risk-taking23

Risk-taking Effect and Equity-based compensation24

Firm performance and Equity-based compensation24

Analysis26

CHAPTER 3: DATA AND METHODOLOGY31

Data31

Rationale for using Least Square Method34

Implementing Least-Squares Estimation Method in C36

Access of the Data Sources and collection of Data38

Empirical Methodology39

Model variable specification41

Measuring Executive Stock Options:42

Measures of Stock and Accounting Performance42

Long-term vs. Near-term measures:43

The model44

Preferences45

Equilibrium50

CHAPTER 4: RESULTS AND DISCUSSION53

Executive stock options and long-term stock performance53

Near-term accounting performance and ESOs56

Resource cost of manipulation and Risk-aversion58

Corporate governance and Managerial ability60

Variance and expected growth rate61

Robustness check63

CHAPTER 5: CONCLUSION67

REFERENCES69

APPENDIX78

A. The second order condition of the manager's maximization problem78

Table 1: Descriptive statistics of the variables84

Table 2: Executive stock options on long-term stock performance87

Table 3: Executive stock options on near-term accounting performance89

Table 4: The optimal compensation contract (a and ?)90

Table 5: The optimal compensation contract (k and t)90

Table 6: The optimal compensation contract (µ and s2)91

Table 7: Risk-taking effect of executive stock options on long-term performance with capital investment as an endogenous variable92

Figure 1: Sequence of events and decisions95



Abstract

Today almost in every organization discussion about the firm's performance and equity based compensation can be observed. There are many researches done in relation to the firm's performance and equity based compensation by different researchers in order to determine how executive stock options (ESOs) affect the firm's performance in terms of value. This study will be examining the risks associtated with the ESOs on firm's performance by using manager's personal risk inhernt. In order to investigate this objective we will be applying three-stage-least-square method. This methodology will be approximately evaluating the variables such as risk-taking, compensation options, and firm's performance. After analyzing it is confirmed that ESOs rises the managerial risk-taking. After analyzing the results it has been observed that managerial risks implied by Executive Stock Options will amplify the returns on near-term stock and long-term stock. There is an adverse effect on the near- term stocks and constructive impacts on longer-term profits on money invested implying that take time for presentation accounts to imitate Executive Stock Options effect of risk taking. This study builds up an agency model to investigate the optimization of compensation based on ESOs within the incidence of information exploitation and handling. As shown by the analysis that, despite the exploitation of information is correlated (positively) to the volume of the compensation option, the comparative volume of effort exploitation does not rely on the volume of the option of compensation.

CHAPTER 1: INTRODUCTION

There are a lot of researches done that investigated the issues rising from corporate agency problems and equity based executive compensation (Sesil & Yu Peng Lin , 2011: 514). The reason behind the utilization of executive compensation that is based on equity is quite lucid. There are many executives whose compensations are connected with the stock prices of the company. This is done by providing them equity based compensation; making them to work and to motivate ...