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Downsizing decisions: The joint influence of equity incentives and behavioral biases

Thomas J. Lopez, Troy Pollard, Austin Reitenga, Shane Stinson

Journal of Business Finance & Accounting > 50 > 9-10 > 1779 - 1807

Although new investment can be viewed as a decision to pursue projects from a wide number of growth opportunities with easily discernible (and presumably preferable) risk profiles, downsizing (e.g., through layoffs, plant closings, asset divestitures, etc.) is a dichotomous choice to either abandon or continue an existing project where the relative risk between these options is not clear. Our evidence...

article

Employee behavior in employee stock option plans: Why do some employees acquire company stock?

Andrew Pendleton, Andrew Robinson

Human Resource Management > 62 > 2 > 197 - 211

The article focuses on decisions to exercise and hold company stock at the maturity of a broad‐based employee stock options plan. It investigates why some participants choose an uncertain and risky future reward when an immediate and certain increase in wealth could be secured at exercise. It draws on and expands the “mixed gambles” perspective in behavioral agency theory, utilizing a combination...

article

Risk‐Taking Incentives and Earnings Management: New Evidence*

Michael Mayberry, Hyun Jong Park, Tian Xu

Contemporary Accounting Research > 38 > 4 > 2723 - 2757

We reexamine the positive association between stock option vega and earnings management previously documented by Armstrong, Larcker, Ormazabal, and Taylor (2013; henceforth, ALOT). In contrast to ALOT, prior empirical research and practitioner literature emphasizes earnings management's goals of increasing stock price and reducing volatility. Specifically, we assess whether the association is robust...

article

Good for managers, bad for society? Causal evidence on the association between risk‐taking incentives and corporate social responsibility

Michael Mayberry

Journal of Business Finance & Accounting > 47 > 9-10 > 1182 - 1214

Using FAS 123R as an exogenous shock to stock options, I provide evidence that equity‐based risk‐taking incentives discourage corporate social responsibility (CSR). This finding suggests that compensation incentives can motivate managers not to pursue CSR strategies because CSR reduces firms’ risk and provides insurance‐like benefits. Firms with a greater demand for CSR's risk reduction are more sensitive...

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Rank and file equity compensation and earnings management: Evidence from stock options

D. Kip Holderness, Adrienna Huffman, Melissa Lewis‐Western

Journal of Business Finance & Accounting > 46 > 9-10 > 1201 - 1236

The widespread use of rank and file equity‐based compensation suggests that executives believe that rank and file employees can affect firm outcomes, and some research supports this view. If equity‐based incentives influence rank and file employees’ productive efforts, they might also influence their earnings management decisions. We find that increases in rank and file employees’ option‐based compensation—our...

article

Timing of earnings restatements: CEO equity compensation and market reaction

Nourhene BenYoussef, Saqib Khan

Accounting & Finance > 58 > 2 > 341 - 365

This study investigates the impact of chief executive officers’ (CEO) compensation on their choices regarding the timing of earnings restatements. The results indicate a negative relationship between options exercised and lags in disclosing the restated earnings, suggesting that managers who exercise options in a given year tend to release information quickly. This effect is more pronounced if the...

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Stock option taxation: a missing piece in European innovation policy?

Magnus Henrekson, Tino Sanandaji

Small Business Economics > 2018 > 51 > 2 > 411-424

Europe continues to lag behind the USA in venture capital (VC) activity and in the creation of successful startups, and has recently been surpassed by China. This is despite the fact that many European countries have deep financial markets, strong legal institutions, and high R&D spending. We point to the tax treatment of employee stock options as an explanation for the stronger growth of the...

article

Why do firms adopt stock options and who benefits? A natural experiment in China

Lin Jiang, Gerhard Kling, Hong Bo, Ciaran Driver

Pacific-Basin Finance Journal > 2017 > 46 > PA > 124-140

A regulatory change in 2006, permitting equity compensations in China, offers a natural experiment to investigate drivers and outcomes of stock options. There are two unique features. First, adoption of stock options occurred rapidly compared to the US, where stock options have been around for more than 100years with periods of high (1990s) and low (before 1950s) adoption. Second, stock options have...

article

Costs, Benefits, and Tax-Induced Distortions of Stock Option Plans

Rainer Niemann, Dirk Simons

Schmalenbach Business Review > 2003 > 55 > 4 > 321-341

In recent years stock option plans (SOPs) have become an important component of managerial remuneration in most industrialized countries. Commonly accepted corporate as well as individual taxes have a major impact on the costs of an SOP. In contrast, the influence of taxes on the benefits of an SOP remains widely unperceived. This article deals with both cost and benefit aspects simultaneously by...

article

Undermining incentives: CEO reactions to compensation rebalancing

John S. Marsh, Rachel Graefe-Anderson

Journal of Management and Governance > 2018 > 22 > 2 > 365-391

Directors commonly “punish” CEOs for overly risky behavior by rebalancing their compensation to include more restricted stock and fewer stock options. This paper extends the behavioral-agency model to describe how CEOs will manage their holdings of stock and stock options in response to this form of compensation rebalancing. In doing so, it finds that CEOs respond by selling existing stock holdings...

article

Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity

Hui James, Bradley W. Benson, Chen (Ken) Wu

The Quarterly Review of Economics and Finance > 2017 > 65 > C > 328-345

Higher CEO ownership and cash payouts have the potential to mitigate agency conflicts associated with overinvestment of free cash flows. But empirical evidence on the effect of CEO ownership on payout policy is mixed. Previous studies, however, use CEO ownership percentage as a proxy for delta (the sensitivity of CEO wealth to stock price). Ownership percentage is known to decrease in firm size, while...

article

What have we learned from SFAS 123r and IFRS 2? A review of existing evidence and future research suggestions

Alexander Merz

Journal of Accounting Literature > 2017 > 38 > C > 14-33

The fundamental change in accounting rules for equity-based compensation (EBC) instituted by SFAS 123, SFAS 123r, and IFRS 2 has allowed for new insights related to a variety of research questions. This paper discusses the empirical evidence generated in the wake of the new regulation and categorizes it into two broad streams. The first stream encompasses research on the changed use of EBC and the...

article

Growth through rigidity: An explanation for the rise in CEO pay

Kelly Shue, Richard R. Townsend

Journal of Financial Economics > 2017 > 123 > 1 > 1-21

The dramatic rise in CEO compensation during the 1990s and early 2000s is a longstanding puzzle. In this paper, we show that much of the rise can be explained by a tendency of firms to grant the same number of options each year. Number-rigidity implies that the grant-date value of option awards will grow with firm equity returns, which were very high on average during the tech boom. Further, other...

article

The success of option listings

Alejandro Bernales

Journal of Empirical Finance > 2017 > 40 > C > 139-161

We examine unexplored factors that affect the ex-post adoption rates of newly listed stock options. We show that a variety of measures of information asymmetries concerning underlying stocks predict option adoption rates. These predictive relationships are robust after including factors that have been found to be significant in earlier literature, such as stock volatility and volume. Moreover, we...

article

Rank and file employees and the discovery of misreporting: The role of stock options

Andrew C. Call, Simi Kedia, Shivaram Rajgopal

Journal of Accounting and Economics > 2016 > 62 > 2-3 > 277-300

We find that firms grant more rank and file stock options when involved in financial reporting violations, consistent with managements’ incentives to discourage employee whistle-blowing. Violating firms grant more rank and file options during periods of misreporting relative to control firms and to their own option grants in non-violation years. Moreover, misreporting firms that grant more rank and...

article

Gambling preference and individual equity option returns

Suk-Joon Byun, Da-Hea Kim

Journal of Financial Economics > 2016 > 122 > 1 > 155-174

We investigate the relation between the option returns and the underlying stock's lottery-like characteristics. Call options written on the most lottery-like stocks underperform otherwise similar call options written on the least lottery-like stocks by 10–20% per month. Moreover, the more lottery-like the underlying stocks, the further and more frequently the options deviate from the put–call parity...

article

An executive hierarchy analysis of stock options: Does gender matter?

J. Samuel Baixauli-Soler, Maria Belda-Ruiz, Gregorio Sanchez-Marin

Review of Managerial Science > 2017 > 11 > 4 > 737-766

This study takes a step forward in addressing the influence of stock options on executive risk-taking behavior, examining the moderating role of the executive hierarchy—CEOs versus non-CEO executives—and the gender effect within these corporate positions. Panel data analysis for matched samples of S&P 1500 listed firms between 2006 and 2011 confirms both hierarchical and gender differences in...

article

Are employee stock option exercise decisions better explained through the prospect theory?

Hamza Bahaji

Annals of Operations Research > 2018 > 262 > 2 > 335-359

In this paper, we introduce a new framework for the analysis of employee stock options exercise decisions. We develop a distorted lattice model where the exercise decision obeys a policy that maximizes the expected value of the exercise outcomes under the Cumulative Prospect Theory. Using a large US dataset of exercise transactions, we show that our framework broadly outperforms the Expected Utility...

article

Stock options: From backdating to spring loading

Giuliano Bianchi

The Quarterly Review of Economics and Finance > 2016 > 59 > C > 215-221

In this article I explore the impact of the introduction of the Sarbanes–Oxley Act (SOX) in 2002 and the Securities and Exchange Commission's implementation of the Act in 2006 on the options granting process. I show that after the introduction of the SOX and its implementation the practice of backdating options was substituted with the practice of “spring loading” options around analysts’ price targets...

article

Bankers’ stock options, risk-taking and the financial crisis

Marizah Minhat, Mazni Abdullah

Journal of Financial Stability > 2016 > 22 > C > 121-128

This study investigates the relationship between the use of stock options and bank risk in the context of the 2007–2008 financial crisis for banks that are authorised to accept deposits in the United Kingdom. These banks are affected by the European regulation on variable pay, but, to our knowledge, their usage of stock options has not been examined in previous studies. Paying bankers with stock options...

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Search results

Downsizing decisions: The joint influence of equity incentives and behavioral biases

Employee behavior in employee stock option plans: Why do some employees acquire company stock?

Risk‐Taking Incentives and Earnings Management: New Evidence*

Good for managers, bad for society? Causal evidence on the association between risk‐taking incentives and corporate social responsibility

Rank and file equity compensation and earnings management: Evidence from stock options

Timing of earnings restatements: CEO equity compensation and market reaction

Stock option taxation: a missing piece in European innovation policy?

Why do firms adopt stock options and who benefits? A natural experiment in China

Costs, Benefits, and Tax-Induced Distortions of Stock Option Plans

Undermining incentives: CEO reactions to compensation rebalancing

Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity

What have we learned from SFAS 123r and IFRS 2? A review of existing evidence and future research suggestions

Growth through rigidity: An explanation for the rise in CEO pay

The success of option listings

Rank and file employees and the discovery of misreporting: The role of stock options

Gambling preference and individual equity option returns

An executive hierarchy analysis of stock options: Does gender matter?

Are employee stock option exercise decisions better explained through the prospect theory?

Stock options: From backdating to spring loading

Bankers’ stock options, risk-taking and the financial crisis

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