ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Influence of Stock Option Grants on the Management Performance of Firms

  • Tae Hwa Yoon Kyungwon University
  • Junghwa Hong Kyungwon University
  • Kim Seon Gu Hansei University

Asian Tax Journal Vol. 6 No. 4 (2005), pp. 213-235

Abstract

The purpose of this study is to test the influence of stock option grants on the mid/long-term management performance of firms. For this purpose, we collected the related data of listed and registered corporations in the Korea Stock Exchange and KOSDAQ market, and so executed t-test. The results of this study are summarized as follows. (i) First, in stock option introduction firms, the performance after grants was lower than that before grants. In the return on assets(ROA) as the measurement variable of management performance, the performance after grants was statistically lower at the significance level of 1%, so that it could support the hypothesis. In the return on equity(ROE), the performance after grants was higher, but was not statistically significant. Additionally, according to the results of comparing the performance before stock option grants with the performance subtracting the compensation cost, which treated the performance as the cost of the current term after stock option grants, in the return on assets(ROA), the performance after grants was statistically lower at the significance level of 1%, whereas, in the return on equity(ROE), the performance after grants was higher, but was not statistically significant. These results were opposite to the expectation that the introduction of stock option system would persue the short-term management performance and medium/long-term growth of firms, and induce managers to make the decision for the maximization of stock prices, so that it could ultimately maximize the earnings of stockholders. (ii) Second, in the management performance difference between stock option introduction firms and stock option non-introduction firms, the performance of introduction firms was lower. In the return on assets(ROA) as the measurement variable of management performance, the performance of introduction firms was statistically lower at the significance level of 1%, so that it could support the hypothesis. In the return on equity(ROE), the performance of introduction firms was higher, but was not statistically significant. Additionally, according to the difference between the performance of non-introduction firms and the performance subtracting the compensation cost, which treated the performance as the cost of the current term after the stock option grants of introduction firms, in the return on assets(ROA), the performance of introduction firms was statistically lower at the significance level of 1%, whereas, in the return on equity(ROE), the performance of introduction firms was higher, but was not statistically significant. These results were consistent with the theory which reported that the behaviors after stock option introduction in stock option introduction firms did not show the positive effect of stock option.

Keywords

  • stock option
  • stock option introduction effect
  • firm characteristics
  • management performance
  • manager compensation.

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