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Option Holdings (option + holdings)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

Incentive Effects of Stock and Option Holdings of Target and Acquirer CEOs

THE JOURNAL OF FINANCE, Issue 4 2007
JIE CAI
ABSTRACT Acquisitions enable target chief executive officers (CEOs) to remove liquidity restrictions on stock and option holdings and diminish the illiquidity discount. Acquisitions also enable acquirer CEOs to improve the long-term value of overvalued holdings. Examining all firms during 1993 to 2001, we show that CEOs with higher holdings (illiquidity discount) are more likely to make acquisitions (get acquired). Further, in 250 completed acquisitions, target CEOs with a higher illiquidity discount accept a lower premium, offer less resistance, and more often leave after acquisition. Similarly, acquirer CEOs with higher holdings pay a higher premium, expedite the process, and make diversifying acquisitions using stock payment. [source]

On-market share buybacks, exercisable share options and earnings management

ACCOUNTING & FINANCE, Issue 1 2008
Balasingham Balachandran
G30; G32; M41 Abstract Chan et al. (2006b) suggest that managers might announce a share buyback to manipulate investors' perceptions and capitalize on the positive price reaction usually associated with the announcement. The incentive to do so is greater when managers have exercisable options. Prior studies document that managers engage in upwards earnings management for opportunistic reasons related to option holdings (Bergstresser and Philippon, 2006). We examine the association between earnings management and exercisable option holdings for buyback firms to investigate if earnings management in the pre-buyback period is greater for firms with equity incentives to increase share price. Our results, using 138 buybacks over the period 1996,2003, support our prediction. We find that buyback firms with both exercisable options that are in-the-money prior to the buyback announcement as well as options that are exercised in the buyback period have higher discretionary current accruals than buyback firms with no exercisable options, unexercised options or with out-of-the-money options. Overall, our results are consistent with buyback firms with exercisable options using earnings management and buyback announcements to maximize option payoffs, and buyback firms without exercisable options signalling undervaluation. [source]

SIX CHALLENGES IN DESIGNING EQUITY-BASED PAY

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2003
Brian J. Hall
The past two decades have seen a dramatic increase in the equitybased pay of U.S. corporate executives, an increase that has been driven almost entirely by the explosion of stock option grants. When properly designed, equity-based pay can raise corporate productivity and shareholder value by helping companies attract, motivate, and retain talented managers. But there are good reasons to question whether the current forms of U.S. equity pay are optimal. In many cases, substantial stock and option payoffs to top executives,particularly those who cashed out much of their holdings near the top of the market,appear to have come at the expense of their shareholders, generating considerable skepticism about not just executive pay practices, but the overall quality of U.S. corporate governance. At the same time, many companies that have experienced sharp stock price declines are now struggling with the problem of retaining employees holding lots of deep-underwater options. This article discusses the design of equity-based pay plans that aim to motivate sustainable, or long-run, value creation. As a first step, the author recommends the use of longer vesting periods and other requirements on executive stock and option holdings, both to limit managers' ability to "time" the market and to reduce their incentives to take shortsighted actions that increase near-term earnings at the expense of longer-term cash flow. Besides requiring "more permanent" holdings, the author also proposes a change in how stock options are issued. In place of popular "fixed value" plans that adjust the number of options awarded each year to reflect changes in the share price (and that effectively reward management for poor performance by granting more options when the price falls, and fewer when it rises), the author recommends the use of "fixed number" plans that avoid this unintended distortion of incentives. As the author also notes, there is considerable confusion about the real economic cost of options relative to stock. Part of the confusion stems, of course, from current GAAP accounting, which allows companies to report the issuance of at-the-money options as costless and so creates a bias against stock and other forms of compensation. But, coming on top of the "opportunity cost" of executive stock options to the company's shareholders, there is another, potentially significant cost of options (and, to a lesser extent, stock) that arises from the propensity of executives and employees to place a lower value on company stock and options than well-diversified outside investors. The author's conclusion is that grants of (slow-vesting) stock are likely to have at least three significant advantages over employee stock options: ,they are more highly valued by executives and employees (per dollar of cost to shareholders); ,they continue to provide reasonably strong ownership incentives and retention power, regardless of whether the stock price rises or falls, because they don't go underwater; and ,the value of such grants is much more transparent to stockholders, employees, and the press. [source]

The Role of Managerial Stock Option Programs in Governance: Evidence from REIT Stock Repurchases

REAL ESTATE ECONOMICS, Issue 1 2010
Chinmoy Ghosh
This article examines the role of stock option programs and executive holdings of stock options in real estate investment trust (REIT) governance. We study the issue by analyzing how the market reaction to a stock repurchase announcement varies as a function of the individual REIT's governance structure. In particular, we examine how executive and employee stock option holdings influence the market reaction to a firm's announcement of a stock repurchase. Using a sample of REIT repurchase announcements, we find that the market reacts more favorably to announcements by firms where executives have larger option holdings and the chief executive officer is not entrenched. Our results with respect to the roles of stock option holdings of executives and nonexecutives differ from those reported for a cross-section of non-REIT firms. While we find evidence supporting the importance of executive stock options in aligning the incentives of management and reinforcing the positive signaling associated with a repurchase announcement, we find little evidence that the market views REIT repurchases as being used primarily to fund option exercise. We attribute these findings to greater dependence by REIT investors on internal governance mechanisms (such as stock option programs) as a result of regulatory restrictions that limit external monitoring such as hostile takeovers. [source]

THE RELATIONSHIP BETWEEN FINANCIAL INCENTIVES FOR COMPANY PRESIDENTS AND FIRM PERFORMANCE IN JAPAN,

THE JAPANESE ECONOMIC REVIEW, Issue 4 2008
KATSUYUKI KUBO
Kaplan (1994) concludes that the relationship between top pay and stock performance in Japan is similar to that in the USA. Using a new and comprehensive data set that includes presidents' stock and their stock option holdings, this study estimates the sensitivity of Japanese presidents' wealth to shareholder wealth in the period 1977,2000. Contrary to the commonly held belief that Japanese corporate governance is becoming more like that in the USA, the results show that pay,performance sensitivity actually decreased substantially after 1990. In 2000, Japanese presidents received $US22,100 when stock returns increased from ,2.1% to 14.8%. [source]