Benefit Linkage Caused By The Incentive Of Executive Stock Option In Chinese Listed Corporation

Executive stock option (ESO) is not only the issues of compensation and incentive, but also can cause a series of interest linkage. According to its basic theories, stock option incentive focuses on the maximization of long-term value of shareholders and aims at to solve the principal-agent problem brought by the separation between investors and operators with the means of their interest’s combination. Generally, ESO can stimulate the subjective initiative and then better the company performance. However, for information asymmetry and moral hazard problem, it may lead to the problem of interest conflict between principal and agent, and cause interests linkage among other relevant parties. Meanwhile, executive power exacerbates the probability of moral hazard, which restricts the effect and interest linkage way of stock option incentive. In my dissertation, executive power means executive’s ability by which executive can act according to self-willing and suppress different views to maximize their own interests, and mainly embody as the expansion of residual control rights. So, it is necessary that we should not ignore the constraint of executive power when we analyze the incentive effect of executive stock option. To measure an executive’s power, we use five dimensions that include whether the executive hold shares and continuously is appointed, duality, equity concentration, and whether the executive is an expert (means the executive has got a master degree or above, or high academic title), and then synthesize the composite index of executive power with principal component factor analysis. On the basis of above analysis, we explore the benefits linkage brought by the incentive of ESO with the disturbance of executive power.In order to discuss the interest linkage of ESO incentive, we explore the driver of ESO plan from executive power, internal conditions and external environment three aspects. Controlling some related factors such as corporate size, liquidity, equity structure, financial leverage, company risk, etc., we find that the greater the executive power of a corporate, the more the possibility that the company would introduce the incentive plan of ESO, and the growth opportunity and the interference of accounting noise insignificantly impact on the possibility of the incentive plan of ESO to be launched.By means of the analysis about the overall performance of companies that have announced the incentive plan of ESO, we find the performance of the group of company with ESO plan is significantly higher than matched group either before or after, and the profitability of company with ESO planes inertial. With linear regression analysis, we find that ESO plan positively affect the corporate performance significantly, and size, employee compensation and prior period performance also closely related with current performance. When we consider the accumulated power and the intensity of ESO, executive power negatively impact on the current achievement of company significantly. Whereas, when we don’t consider the intensity of ESO, executive power insignificantly affects the corporate performance, even though the direction of influence as before.Analyzing the ultimate effect of secondary incentive that the ESO incentive plan produced, we find out that the secondary incentive (sensitivity of performance to salary) in the corporate with ESO incentive plan is significantly higher than comparison group either before or after, and it reaches a climax before years ago or in the same year, then descend and rapidly close to the average level of the whole listed companies. With structural equation model (SEM), we test the relationship among ESO plan, corporate performance and the secondary incentive, and find that ESO plan promotes the growth of the company performance which restrains the share of employee compensation in creative values. The counteraction of secondary incentive on performance is significant in the group of state-owned holding companies, but in the group of non-state-owned corporations is not. Meanwhile, executive power effect secondary incentive significantly in the group of non-state-owned corporations, but not in the group of state-owned holding companies. Simultaneously, the influence of executive power on secondary incentive is different in diverse stages and controlling shareholders.We research the correlation between the first announcement of ESO incentive and the effect of capital market with the method of event study, and only find it is very weak negative and statistically insignificant. Nevertheless, if the window periods go back about two weeks, we can become conscious of that there is a significant abnormal return in capital market before the two weeks or so prior to the announcement, which shows that capital market may have got the being leaked internal information in advance which indirectly led to the change of investment behavior. However, there is neither any significant abnormal return nor any significant negative reaction in two weeks later of the public statements, which indicates that capital market has resented calming after the announcement and the oscillation brought by the internal information was fading. In addition, we also find that, compared with foreign ESO plans, our shave following characteristics, such as, the inspired period are shorter, exercise price are lower, vesting conditions are relatively looser, and performance indicators are less.We also investigate whether dividend payout is affected by the ESO plan, executive power and their resonance effect. The empirical analysis result indicates that, even after controlling for equity ratio, company value, sales growth, net cash flow, shareholding ratio of major shareholders and return on equity, the possibility of dividend payments is significantly affected by ESO plan and executive power, as well as their resonance effect. Another, the relationship between executive power and dividend payout ratio is convex quadratic parabolic, which is significant at1%level. But both ESO plan and resonance effect insignificantly affects the rate of dividend payout. Meanwhile, the ESO plan whose incentive objects include chairman and members of board would significantly reduce the possibility of dividend payments and dividend payout ratio.