Study On The Adjustment Of Exercise Price Of Stock Options Incentive

As one of the main types of equity incentive, stock option incentive is widely implemented among China’s listed Companies, the target of the system is to ease the agency conflicts caused by the separation of two rights. However, stock options incentive plan is not a perfect contract, there are still some loopholes. As the incentive targets, their final benefits depend on the value of stock options, and the exercise price will directly affect the value of stock options, so the managers are likely to take advantage of their rights to influence the adjustment of the exercise price in order to obtain personal gain, that is as far as possible to reduce the exercise price in order to obtain maximum benefits. However, the behavior of adjustment of exercise price increases the value of the option, which not only weakens the incentive plan implementation effect, but also difficult to achieve the desired objectives to alleviate agency conflicts, so study on the adjustment of exercise price of stock options incentive has important practical significance and policy value.This paper selects the first implementation of the stock option incentive plan during the period 2006 to 2014 as a sample and then analyzes the economic consequences and the influencing factors about it. Specifically, this paper analyzes the basic status from the angles of the number of adjustment and the number of companies, the study finds the adjustment of exercise price is mainly due to dividend distribution matters, and few adjustments is mainly due to the issue equity warrants, issuance, allotment and pricing, indicating that the exercise price of stock options after adjustment basically becomes low. Then this paper analyzes how each adjustment of exercise price influences the value of stock options, it uses the value of stock price minus the exercise price to measure the value of the stock options, and analyzes the change of the value of stock options after each adjustment of the exercise price of stock options, the study finds that more than 80% of the adjustment of exercise price increase the value of the option, about 15% of the adjustment of exercise price reduce the value of the option, less than 1% of the adjustment of exercise price do not change the value of the option, this shows that most of the adjustment of exercise price are useful to managers. And this paper also analyzes which factors mainly effects the adjustment of exercise price, this paper selects the willingness of adjustment and the degree of adjustment as the explained variables and analyzes how management power affects the adjustment of exercise price by using logit model and random effects model, the study finds when the managers have greater power, the willingness of adjustment and the degree of adjustment are higher.The results mean that the adjustment of exercise price produces a negative impact, so in order to deal with opportunism exercise price adjustment behavior of stock options incentive, we should strengthen the corporate governance mechanism, improve laws and regulations about the adjustment of exercise price, improve capital market efficiency and develop manager market, with a view to further enhance the effectiveness of the implementation of the plan.