Executive Stock Option Incentive Effect Research

Due to the separation of ownership and management in modern corporations, there are deviations and conflicts between the target of the management and that of the owner. Equity incentive is viewed as an efficient method to harmonize the interests of shareholders and the management thus reducing the agency cost. In the increasingly fierce competitive environment, more and more of our listing companies choose to grant employees especially the management stock option to incentive them. However, further researches are still necessary as it is not sure whether this imported method is still effective under the environment of our political system and capital market.Under this background, this paper analyzes the effect of executive stock option incentives theoretically and empirically. After reviewing related research results from both domestic and overseas, this paper grounds on human resource theory and the incentive theory in economics which includes the principal-agent theory, the theory of residual rights of claimant and the theory of cooperative anticipation. Then this paper analyzes the related current situation of the application of executive stock option incentive in Chinese publicly traded companies. On this basis, this paper carries out an empirical study to discuss two aspects of the effect of executive stock option incentive which are the influence on company performance and the influence on investors’expectation of company performance. The company performance here indicates two aspects which are the company’s financial performance and its market value.Through the descriptive analysis of data since2006, this paper draws conclusions as follows:(1) companies adopting the executive stock option incentive were mainly from the manufacturing industry, the information technology industry and the real estate industry. Among the above three industries, the information technology industry had the highest implementation rate.(2) The implementation rate of announced plan was lower from2006to2009, while it was higher during the period fromn2010to2011.(3) As for the setting of option clauses, companies were more cautious on incentive strength and for more than sixty percent of companies, the percentage of the total share capital which they grant was no more than four percent. Companies which grant stock option approaching the legal limit were still in the minority. The period of validity of78.5%incentive plans was three to five years. Ac cord ing to the paired-sample test, after the implementation of stock option incentive, two indicators, which are the natural logarithm of net income and the natural logarithm of net income excluding non-recurring profit and loss, increased year by year and the difference was significant. This finding indicated that the implementation of stock option incentive could improve the financial performance of a company. Using the regression analysis method, this paper finds that stock option incentive can improve the company’s long-term financial performance, but the long-term market value of the company is not affected. Evidence from the event study proves that the announcement of stock option incentive plan receives short-term abnormal returns in the stock market which indicates that investors have a positive expectation on the company’s future performance due to the implementation of stock option incentive.