Title

The Effect of Risk in the Choosing between Stock Options or Restricted Stock Rewards

Translated Titles

風險對採用股票選擇權或限制權利新股之影響

DOI

10.6538/TAR.202012_16(2).0003

Authors

戴怡蕙(Yi-Hui Tai);王盈傑(Ying-Chieh Wang)

Key Words

Earnings management ; Firm performance ; Risk ; Equity-based compensation plans ; 盈餘管理 ; 公司績效 ; 風險 ; 權益薪酬

PublicationName

中華會計學刊

Volume or Term/Year and Month of Publication

16卷2期(2020 / 12 / 01)

Page #

259 - 295

Content Language

英文;繁體中文

Chinese Abstract

Stock options are given to employees through granted rights to buy stocks at a certain exercise price when the vesting conditions are completed. Restricted stock rewards, conversely, are granted stocks awarded to employees with limited rights in which they can acquire full stock rights after the vesting conditions are completed. This study uses the concepts of systematic risk and idiosyncratic risk to measure the risk that a firm encounters based on data of Taiwanese-listed companies from 2011 to 2018 and investigates the effects of matching these two equity-based compensation plans and said risk on firm performance and earnings management. Our empirical results show that a company's performance is better if the idiosyncratic risk that firm faces is higher and there is a larger amount of stock options compared to the amount of restricted stock rewards. In addition, the level of earnings management is not greater when the firm's systematic risk or idiosyncratic risk is higher and when the ratio of the amount of stock option to the amount of restricted stock is higher.

English Abstract

股票選擇權為先授予員工一可以行使價格購買股票的權利,在行使條件滿足時,員工即可依該行使價格購買股票。與股票選擇權不同的是,限制權利新股為授予員工一有限權利的股票,在行使條件滿足時,員工便可行使其原先被限制的股票權利。本研究主要在調查,企業所面臨的風險在企業對此兩種員工權益薪酬對企業績效與盈餘管理中的角色。本研究透過系統性風險與獨特性風險來衡量企業所面臨的風險,並以2011年至2018年的上市公司為樣本。結果發現,當企業所面臨的獨特性風險較高時,較多的股票選擇權比例會有較佳的企業績效。此外,當公司所面臨的風險較高且股票選擇權數量對限制權利員工新股數量比率越高時,公司並沒有較高的盈餘管理程度。

Topic Category 社會科學 > 財金及會計學
Reference
  1. Abowd, J. 1990. “Does performance-based managerial compensation affect corporate performance.” Industrial and Labor Relations Review 43(3): 52S-73S.
    連結:
  2. Agrawal, A. 1990. “Large shareholders and the monitoring of managers: The case of antitakeover charter amendments.” Journal of Financial and Quantitative Analysis 25(2): 143-161.
    連結:
  3. Antle, R., and A. Smith. 1986. “An empirical investigation of the relative performance evaluation of corporate executives.” Journal of Accounting Research 24(1): 1-39.
    連結:
  4. Baysinger, B., and R. Hoskisson. 1990. “The composition of boards of directors and strategic control: Effects on corporate strategy.” Academy of Management Review 15(1): 72-87.
    連結:
  5. Beatty, R. P., and E. J. Zajzc. 1994. “Managerial incentives, monitoring, and risk-bearing: A study of executive compensation, ownership, and board structure in initial public offerings.” Administrative Science Quarterly 39(2): 313-335.
    連結:
  6. Bergstresser, D., and T. Philippon. 2006. “CEO incentives and earnings management.” Journal of Financial Economics 80(3): 511-529.
    連結:
  7. Bettis, J. C., J. M. Bizjak, J. L. Coles, and S. L. Kalpathy. 2015. “Performance-vesting provisions in executive compensation.” Working paper, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2289566
    連結:
  8. Bloom, M., and G. T. Milkovich. 1998. “Relationships among risk, incentive pay, and organizational performance.” Academy of Management Journal 41(3): 283-297.
    連結:
  9. Burns, N., and S. Kedia. 2006. “The impact of performance-based compensation on misreporting.” Journal of Financial Economics 79(1): 35-67.
    連結:
  10. Cao, J., and B. Han. 2016. “Idiosyncratic risk, costly arbitrage, and the cross-section of stock returns.” Journal of Banking and Finance 73, 1-15.
    連結:
  11. Casavecchia, L., and J. Y. Suh. 2016. “Managerial incentives for risk-taking and internal capital allocation.” Australian Journal of Management 42(3): 428-461.
    連結:
  12. Chen, Y. C., C. H. Lee, and P. I. Chou. 2015. “Stock-based Compensation and earnings management behaviors.” Review of Pacific Basin Financial Markets and Policies 18(2): 441-476.
    連結:
  13. Chang, R. D., and C. J. Fang. 2006. “Effects of the information disclosure and evaluation system on earnings management.” International Journal of Accounting Studies 42(1): 1-22.
    連結:
  14. Chi, W. C., L. L. Lisic, and M. Pevzner. 2011. “Is enhanced audit quality associated with greater real earnings management?” Accounting Horizons 25(2): 315-335.
    連結:
  15. Choe, C., and X. Yin. 2006. “Should executive stock options be abandoned?” Australian Journal of Management 31(2): 163-179.
    連結:
  16. Cohen, D., and P. Zarowin. 2010. “Accrual-based and real earnings management activities around seasoned equity offerings.” Journal of Accounting and Economics 50(1): 2-19.
    連結:
  17. Colpan, A. M. 2008. “Are strategy-performance relationships contingent on macroeconomic environments? Evidence from Japan's textile industry.” Asia Pacific Journal of Management 25(4): 635-665.
    連結:
  18. Core, J. E., and W. R. Guay. 2001. “Stock Option plans for non-executive Employees.” Journal of Financial Economics 61(2): 253-287.
    連結:
  19. Core, J. E., and D. F. Larcker. 2002. “Performance consequences of mandatory increases in executive stock ownership.” Journal of Financial Economics 64(3): 317-340
    連結:
  20. Cornett, M. M., A. J. Marcus, and H. Tehranian. 2008. “Corporate governance and pay-for-performance: The impact of earnings management.” Journal of financial economics 87(2): 357-373.
    連結:
  21. Daily, C., and J. Johnson. 1997. “Sources of CEO power and firm financial performance: A longitudinal assessment.” Journal of Management 23(2): 97-117.
    連結:
  22. DeB, F. H. 1986. “Market structure and price-cost performance under endogenous profit risk.” The Journal of Industrial Economics 35(1): 35-59.
    連結:
  23. Dechow, P. M., S. P. Kothari, and R. L. Watts. 1998. “The relation between earnings and cash flows.” Journal of Accounting and Economics 25(2): 133-168.
    連結:
  24. Denski, J. S., Frimor, H., and D. E. M. Sappington. 2004. “Efficient manipulation in a repeated setting.” Journal of Accounting Research 42(1): 31-50.
    連結:
  25. Demsetz, H., and K. Lehn. 1985. “The structure of corporate ownership: Cause and consequences.” Journal of Political Economy 93(6): 1155-1177.
    連結:
  26. Fama, E. F., and M. C. Jensen. 1983a. “Separation of ownership and control.” The Journal of Law and Economics 26(2): 301-326.
    連結:
  27. Fama, E. F., and M. C. Jensen. 1983b. “Agency problems and residual claims.” The Journal of Law and Economics 26(2): 327-349.
    連結:
  28. Feinberg, R. M. 1981. “Employment instability, earnings and market structure.” Applied Economics 13(2): 257-265.
    連結:
  29. Gao, P., and R. E. Shrieves. 2002. “Earnings management and executive compensation: A case of overdose of option and underdose of salary?” Working paper, available at: http://papers.ssrn.com/sol3/pape rs.cfm?abstract_id=302843. García-Meca, E., and J. P. Sánchez-Ballesta. (2009. “Corporate governance and earnings management: A meta-analysis.” Corporate governance: an international review 17(5), 594-610.
    連結:
  30. Gaver, J. J., and K. M. Gaver. 1993. “Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies.” Journal of Accounting and Economics 16(1): 125-160.
    連結:
  31. Goldman, E., and S. L. Slezak. 2006. “An equilibrium model of incentive contracts in the presence of information manipulation.” Journal of Financial Economics 80(3): 603-626.
    連結:
  32. Gray, S. R., and A. A. Cannella Jr. 1997. “The role of risk in executive compensation.” Journal of Management 23(4): 517-540.
    連結:
  33. Grossman, S. J., and O. D. Hart. 1983. “An analysis of the principal agent problem.” Econometrica 51(1): 7-45.
    連結:
  34. Gunny, K. 2010. “The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earning benchmarks.” Contemporary Accounting Research 27(3): 855-888.
    連結:
  35. Habib, A., B. U. Bhuiyan, and A. Islam. 2013. “Financial distress, earnings management and market pricing of accruals during the global financial crisis.” Managerial Finance 39(2), 155-180.
    連結:
  36. Haynes, M., S. Thompson, and M. Wright. 2007. “Executive remuneration and corporate divestment: Motivating managers to make unpalatable decisions.” Journal of Business Finance and Accounting 34(5-6): 792-818.
    連結:
  37. Henley, A., A. Carruth, and A. Dickerson. 2003. “Industry-wide versus firm-specific uncertainty and investment: British company panel data evidence.” Economics Letters 78(1): 87-92.
    連結:
  38. Hill, C. W. L., and P. Phan. 1991. “CEO tenure as a determinant of CEO pay.” Academy of Management Journal 34(3): 707-717.
    連結:
  39. Hirshleifer, D., and Y. Suh. 1992. “Risk, managerial effort and project choice.” Journal of Financial Intermediation 2(3): 308-345.
    連結:
  40. Hodge, F., S. Rajgopal, and T. Shevlin. 2008. “Do managers value stock options and restricted stock consistent with economic theory?” Contemporary Accounting Research 26: 899-932
    連結:
  41. Holmstrom, B. 1979. “Moral hazard and observability.” The Bell Journal of Economics 10(1): 74-91.
    連結:
  42. Irving, J., W. Landsman, and B. Lindsey. 2011. “The valuation differences between stock option and restricted stock for U.S. firms.” Journal of Business Finance and Accounting 38(3-4): 395-412.
    連結:
  43. Isobe, T., S. Makino, and D. B. Montgomery. 2008. “Technological capabilities and firm performance: The case of small manufacturing firms in Japan.” Asia Pacific Journal of Management 25(3): 413-428.
    連結:
  44. Jensen, M. C., and W. H. Meckling. 1976. “Theory of the firm: Managerial behavior, agency costs and ownership structure.” Journal of Financial Economics 3(4): 305-360.
    連結:
  45. Jones, J. 1991. “Earnings management during import relief investigations.” Journal of Accounting Research 29(2): 193-228.
    連結:
  46. Ju, N., H. Leland, and L. W. Senbet. 2014. “Options, option repricing in managerial compensation: The effects on corporate investment risk.” Journal of Corporate Finance 29: 628-643.
    連結:
  47. Kothari, S. P., and J. L. Zimmerman. 1995. “Price and return models.” Journal of Accounting and Economics 20(2): 155-192.
    連結:
  48. Kothari, S. P., A. J. Leone, and C. Wasley. 2005. “Performance matched discretionary accrual measures.” Journal of Accounting and Economics 39(1): 163-197.
    連結:
  49. Lambert, R., and D. Larcker. 2004. “Stock options, restricted stock, and incentives.” Working paper, University of Pennsylvania.
    連結:
  50. Larcker, D. F., S. A. Richardson, and I. Tuna. 2007. “Corporate governance, accounting outcomes, and organizational performance.” The Accounting Review 82(4): 963-1008.
    連結:
  51. Laux, V. 2013. “Executive equity mix, earnings manipulation, and project continuation.” Working paper, available at: https://pdfs.semanticscholar.org/0f6f/10920500fefc52c93bb086d4df61abb93edc.pdf
    連結:
  52. Lee, C. L. 2006. “Relationships among uncertainty, top management pay gap and firm performance: A tale of tournament theory.” Journal of Accounting Review 42: 23-53.
    連結:
  53. Lee, K. W., B. Lev, and G. H. Yeo. 2007. “Executive pay dispersion, corporate governance, and firm performance.” Review of Quantitative Finance and Accounting 30(3): 315-338.
    連結:
  54. Lubatkin, M., and H. M.O'Neill. 1987. “Merger strategies and capital market risk.“ Academy of Management Journal 30(4): 665-684.
    連結:
  55. Mallette, P., and K. Fowler. 1992. “Effects of board composition and stock ownership on the adoption of poison pills.” Academy of Management Journal 35(5): 1010-1035.
    連結:
  56. Mehran, H. 1995. “Executive compensation structure, ownership, and firm performance.” Journal of Financial Economics 38(2): 163-184.
    連結:
  57. Miller, J. S., R. M. Wiseman, and L. R. Gomez-Mejia. 2002. “The fit between CEO compensation design and firm risk.” Academy of Management Journal 45(4): 745-756.
    連結:
  58. Morck, R., D. Wolfenzon, and B. Yeung. 2005. “Corporate governance, economic entrenchment, and growth.” Journal of Economic Literature 43(3): 655-720.
    連結:
  59. Mossin, J. 1996. “Equilibrium in a capital asset market.” Econometrica, 34(4):768-783.
    連結:
  60. Ofek, E., and D. Yermack. 2000. “Taking stock: equity-based compensation and the evolution of managerial ownership.” Journal of Finance 55(3):1367-1384.
    連結:
  61. Pearce, J., and S. Zahra. 1992. “Board Composition from a strategic contingency perspective.” Journal of Management Studies 29(4): 411-438.
    連結:
  62. Peng, L., and A. Röell. 2008. “Manipulation and equity-based compensation.” The American Economic Review 98(2): 285-290.
    連結:
  63. Petra, S. T., and N. T. Dorata. 2008. “Corporate governance and chief executive officer compensation.” Corporate Governance 8(2): 141-152.
    連結:
  64. Porter, M. 1992. “Capital choices: changing the way America invests in industry.” Journal of Applied Corporate Finance 5(2): 4-16.
    連結:
  65. Roychowdhury, S. 2006. “Earnings management through real activities manipulation.” Journal of Accounting and Economics 42(3): 335-370.
    連結:
  66. Ruefli, T. W., J. M. Collins, and J. R. Lacugna. 1999. “Risk measures in strategic management research: auld langsyne?” Strategic management journal 20(2): 167-194.
    連結:
  67. Ryan Jr, H. E., and R. A. Wiggins III. 2002. “The interactions between R&D: Investment decisions and compensation policy.” Financial Management 31(1): 5-29.
    連結:
  68. Schellenger, M. H., D. D. Wood, and A. Tashakori. 1989. “Board of director composition, shareholder wealth and dividend policy.” Journal of Managements 15(3): 457-467.
    連結:
  69. Sharpe, W. F. 1964. “Capital asset prices: A theory of market equilibrium under conditions of risk.” Journal of Finance 19(3): 425-442.
    連結:
  70. Shiu, W. Y., and S. F. Liu. 2006. “The relationship between CEO compensation and firm risk in Taiwan.” Journal of Risk Management 8(1): 35-47.
    連結:
  71. Stiglitz, J. E. 1975. “Incentives, risk, and information: Notes towards a theory of hierarchy.” The Bell Journal of Economics 6(2): 552-579.
    連結:
  72. Tai, Y. H. 2015. “Restricted stock, board committees, and real earnings management: Evidence from publicly-traded companies in Taiwan.” Journal of Contemporary Accounting 16(1): 1-33.
    連結:
  73. Tai, Y. H. 2018. “Is adoption of restricted stock grants related with firm performance?” Asia Pacific Management Review 23(2): 137-147.
    連結:
  74. Tosi, H. L., S. J. Werner, P. Katz, and L. R. Gomez-Mejia. 2000. “How much does performance matter? A meta-analysis of CEO pay studies.” Journal of Management 26(2): 301-339.
    連結:
  75. Tsai, L. C. 2003. “CEO compensation, nonfinancial performance measures and future performance.” Journal of Accounting Review 37: 85-116.
    連結:
  76. Wang, W. Y. 2007. “The relationship between strategy and target cost management system? A comparative case study on two domestic enterprises.” Chiao Da Management Review 27(2): 203-248.
    連結:
  77. Wu, Y. W. 2011. “Optimal executive compensation: Stock options or restricted stocks.” International Review of Economics and Finance 20(4): 633-644.
    連結:
  78. Xie, B., W. N. Davidson III, and P. J. DaDalt. 2003. “Earnings management and corporate governance: the role of the board and the audit committee.” Journal of corporate finance 9(3): 295-316.
    連結:
  79. Yeh, Y. H., T. S. Lee, and T. Woidtke. 2001. “Family control and corporate governance: Evidence from Taiwan.” International Review of Finance 2(1-2): 21-48.
    連結:
  80. Zang, A. Y. 2012. “Evidence on the trade-off between real activities manipulation and accrual-based earnings management.” The Accounting Revie 87(2): 675-703.
    連結:
  81. Aras, G., and D. Kurt. 2012. “The effects of stock option compensation on managerial risk taking behavior and firm financial performance the global financial crisis from a different perspective.” International Journal of Economics and Finance Studies 4(2): 77-90.
  82. Bushee, B. 1998. “The influence of institutional investors on myopic R&D investment behavior.” The Accounting Review 73(3): 305-333.
  83. Core, J. E., R. W. Holthausen, and D. F. Larcker. 1999. “Corporate governance, chief executive officer compensation, and firm performance.” Journal of Financial Economics 51(3): 371-406.
  84. Dechow, P. M., R. G. Sloan, and A. P. Sweeney. 1995. “Detecting earnings management.” The Accounting Review 70(2): 1-33.
  85. Garven, S. A. 2015. “The effect of board and audit committee characteristics on real earnings management: Do boards and audit committees play a role in its promotion or constraint?” Academy of Accounting and Financial Studies Journal 19(1): 67-84.
  86. Hutchinson, M. 2001. “A contracting-agency analysis of the association between firm risk, incentives and firm performance: an Australian perspective.” School of Accounting and Finance Deakin University: 221.
  87. Ittner, C. D., and D. Larcker. 1998. “Innovations in performance measurement: trends and research implications.” Journal of Management Accounting Research 10: 205-238.
  88. Jacobs, M. 1991. Short-term America: The Causes and Cures of Our Business Myopia. Boston, MA: Harvard Business Press.
  89. Matsuura, S. 2008. “On the relation between real earnings management and accounting earnings management: Income smoothing perspective.” Journal of International Business Research 7(3): 63-77.
  90. Nazir, M. S., M. M. Nawaz, W. Anwar, and F. Ahmed. 2010. “Determinants of stock price volatility in Karachi stock exchange: The mediating role of corporate dividend policy.” International Research Journal of Finance and Economics 55:100-107.
  91. Watts, R., and J. Zimmerman. 1986. Positive Accounting Theory. Prentice-Hall, Englewood Cliffs, NJ.
  92. Williamson, O. 1973. “Markets and hierarchies: Some elementrary considerations.” American Economic Association 63(2): 316-325.
  93. Xian, C., and H. Chen. 2011. “Investment, earnings management and equity-based compensation.” Journal of Accounting, Business and Management 18(2): 121-136.