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The Effects Of Firm Characteristics And Recognition Policy On Employee Stock Options Prices After Controlling For Self-Selection

Author

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  • CHII-SHYAN KUO

    (Department of Business Administration, College of Management, National Taiwan University of Science and Technology, 43, Keelung Road Section 4, Taipei, 106 Taiwan, R.O.C.)

  • SHIH-TI YU

    (Department of Quantitative Finance, College of Technology Management, National Tsing Hua University, 101, Kuang Fu Road Section 2, Hsinchu, 300 Taiwan, R.O.C.)

Abstract

We examine whether and how firm characteristics, including firm size and liquidity, affect the relation between employee stock option (ESO) grants (as proxied by disclosed ESO expenses) and firm value. We also investigate how the implementation of a new share-based compensation recognition rule affects the pricing effect of ESOs. Prior studies have provided mixed results concerning how ESOs affect firm value. We argue that their findings could be attributable to self-selection and a non-uniform ESO-share price relation. We use the threshold model to address our research questions after controlling for self-selection bias. We find that markets tend to positively price ESOs in the case of firms characterized by large size and low liquidity. In addition, we find that after the new rule came into effect, ESOs became positively associated with firm value. These results are congruent with ownership and symbolic value theories, the lifecycle stages hypothesis and the contention that an ESO expensing policy enhances the quality of financial statements.

Suggested Citation

  • Chii-Shyan Kuo & Shih-Ti Yu, 2014. "The Effects Of Firm Characteristics And Recognition Policy On Employee Stock Options Prices After Controlling For Self-Selection," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-30.
    • Handle: RePEc:wsi:afexxx:v:09:y:2014:i:02:n:s201049521440003x
    DOI: 10.1142/S201049521440003X
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    References listed on IDEAS

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    1. James J. Heckman, 1976. "Introduction to "Annals of Economic and Social Measurement, Volume 5, number 4"," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Chia-Lin Chang & Shing-Yang Hu & Shih-Ti Yu, 2014. "Recent Developments In Quantitative Finance: An Overview," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-7.

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    More about this item

    Keywords

    Employee stock option; threshold model; self-selection model; J33; M41; C24;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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