Influence Of Executive Stock Option Incentive On Performance Of Listed Company

To survive and obtain long-term development, enterprises must have talents and encourage them to create value for enterprises. Under modern enterprise system, the ownership of enterprises-is separate from its operation and management. Shareholders have the ownership of enterprises but they are not involved in enterprises’management; on the opposite, although the management participates in enterprises’management, they have no rights to intervene in the final profit distribution and disposal of enterprises. The interest conflicts caused by the operation directly impede the realization of the objective—enterprises value maximization. To minimize the interest conflicts and promote the long-term cooperation between shareholders and the management, and effectively alleviate the agency problem, undoubtedly equity incentive is the most appropriate and effective mechanism. It includes many ways, such as stock options, restricted stock, and performance stock and so on. The most popular way of equity incentive in our enterprises is executive stock options, so this research will focus on executive stock options. Executive stock options enable the management to strive to improve the company’s stock price-so as to realize their own interest maximization. Executive stock options can be seen as a connection between the interests of shareholders and the management. The management will concern not only their interests but also the interests of the enterprise. Therefore, executive stock options are inspired by both shareholders and the management.However, executive stock options can effectively display function only with proper external environment. In western countries, applying executive stock options to solve agency problems has been perfect after decades of development from both theory and practical aspects. In China, executive stock options have been introduced for more than ten years, but have been standardization for only five years. And because of Chinese unique political and legal environments, ineffective stock market and internal governance structure, the application of executive stock options in the main board failed to achieve the desired results. But the establishment of the small and medium-sized enterprises board which was set up in 2004 provides a new train of thought for the application of executive stock options in China. Early researches on small and medium-sized enterprises mainly discussed the feasibility of executive stock options from theoretical aspect. The field of empirical study on this topic is still a blank. This paper aims to study the influences of implementing executive stock options on enterprise performance from 2006 when ESO began to be standardization in China.This paper firstly reviews related theoretical and empirical researches to the influence of implementing ESO on enterprise performance, summarizes related theories to executive stock options, including its elements, mechanisms and value, and then analyzes the present situations of the application of executive stock options in medium and small-sized enterprises, and finally establishes research model according to existed research results. Through analyzing present situations of the application of executive stock options in medium and small-sized enterprises in details, we can see that all sample enterprises took performance indictors as exercising conditions. The indictors to measure performance are financial indictors. This shows that the finial objective of implementing executive stock options is to encourage the management to make efforts to achieve enterprise performance increases. Empirical results prove that under current domestic situation, enterprise performance has positive relations with its scale, but has no apparent relations with the publication of the stock options. Compared with the average level of the market, sample companies have better performances, but before and after they implement ESO, their performances have no apparent changes. Their performances change along with the changes in domestic economic situation, rather than whether they implement executive stock options. It can be concluded that in small and medium-sized enterprises, executive stock options do not bring apparent encouraging effects as expected.The paper mainly discusses the reasons why executive stock options fail to display functions from four aspects:the capital market has low effectiveness; imperfect enterprise governance structure; immature professional managers market and unreasonable performance appraisal system in stock options plans. Pointing to these problems, this paper also proposes some constructive ideas. We can overcome capital market deficiencies through formulating relative reasonable exercise price. It is also necessary to improve professional managers market and strengthen supervision on senior managers to avoid moral hazard and adverse selection. Besides, corporate governance and internal control mechanisms should be standardized and improved. It is necessary to improve performance appraisal system and enable them to be consistent with enterprise’s long-term development.The features of this article include:at theoretical aspect, it emphasis on executive stock options, introduces its contents, elements, mechanism and its value, summarizes great theories and empirical literature about executive stock options, and analyzes present situations of implementing stock options in small and medium-sized enterprises from many aspects including industrial distribution, options exercising prices, available years of stock options and required performance indictors to exercise stock options. At empirical aspect, the paper adopts the latest data collected from 2006 to 2010, compares the average performance level of sample companies with that of the market and also examines the performance changes of sample enterprises before and after implementing stock options. This paper also has some deficiencies. On one hand, enterprises performances are influenced by complex factors. When making empirical research, the paper just adopts two explaining variables and one controlling variable and this may bring research deviations; on the other hand, the number of samples is small, since the publication of related regulations to-equity incentives in 2006, only 62 small and medium-sized enterprises have published executive stock options plan. It is hard to avoid deviations to make empirical research using small number of samples.