The Impact Of The Employee Profit Sharing Policy On Firm Performance And Stock Returns

The employee share bonus has been always a sharp weapon of our high-tech companies to recruit talents. A Company appropriates certain percentage of earning to employees through stock distribution and therefore employees receive stocks for free. This is the origin for the legend of high pay for new science and technology nobles. According to international accounting principles, the compensation paid for the service provided by employees shall be recognized as expenses of the company, regardless the methods of payment. However, our employee's stock bonus has been considered as earning distribution and recognized under the stock par value in accordance with legal regulations for a long time. Consequently, the expressions of our domestic financial statements are unable to meet the international requirements and may result in earning overstatement of a business.To follow the international trend, MOEA aggressively process amendments and stipulate the accounting procedures involved with employee share bonus via letter issuance. As referring to the standards of international accounting principles, all public companies must recognized employees bonus in fair value, which was effective from January 1, 2008. After implementing of expense of employee share bonus, the profit of business, shareholders wealth and employees benefit will be affected accordingly. Therefore, this research is to discuss the new regulations for expense of employee share bonus in details, and calculate the bonus amount and changes of stock price under new regulations by using examples to analyze its impact on shareholders'wealth and employees'benefits.This research is aimed to determine the effect of the expensing of employee profit sharing on a firm's performance and stock returns, based on a multiple regression analysis of 240 local,publicly listed companies sampled from the electronics industry between the years 2003~2006. The conclusions of empirical research digest that: 1. The correlation between the employee profit sharing rates and business performance is highly significant and positive correlation. This indicated that employee profit sharing system is effective incentives as well as mechanisms for minimizing agency conflicts. These incentives help improve a firm's performance and align employees'interests with those of investors while they pursue their goals. These effects are even more significant on companies that are technology-intensive, controllers of key knowledge or components, compared to companies that are not technology-intensive, non-holders of key knowledge or components.2. The correlation between the employee profit sharing rates and the stock returns of a company is significant and positive correlation. This indicated that investors consider moderate levels of employee profit sharing rates as incentives, and well-designed bonus schemes help a company's business performance. The motivation from employee profit sharing outweighs the reduction in profits attributable to shareholders and subsequently increase stock returns. Stock returns are relatively higher for companies with lower Book-to-Market ratios and higher firm size, with highly technology-driven and possess competitive advantages in the supply chain network within the electronic industry.3. The interaction between high employee profit sharing rates and firm performance is positive correlation with stock returns and the correlation is significant.According to theories on incentives and profit sharing, there is interaction between employee profit sharing rates and business performance, and companies with higher employee profit sharing rates perform relatively better; only after an exceptional performance were there high profits for employees to share.Investors see the synergy of employee profit sharing arising from the interaction of the above two variables as a company's intangible asset, giving it a positive value and raising the stock returns.