The Effect of R&D Cost on Employee Stock Option Exercises and Operation Profit
Asian Tax Journal Vol. 13 No. 1 (2012), pp. 255-280
Abstract
Given to the CEOs, stock option awards are expected to drive managers’ higher performances and align their interests with the firm value by sharing the ownership together with the stockholders. Under this concern, we aim to verify the purposeful effect of stock option awards through the association test between stock option exercises and firm’s R&D expenditures, followed by corporate long－term performance. From the empirical results, we find that the firms whose managers already exercised their stock options show significantly high abnormal R&D expenditures above the industry average. It implies that the managers put their efforts to increase firm value through the R&D expenditures in order to exercise their stock options under more favorable conditions. Next, the long－term operating performances measured via profitability, growth opportunity and productivity are significantly higher at the following year after the managers exercised their stock options. This result suggests that the managers who received stock option awards more focus on long－term performances in their decision making rather than short term performances. Then, we test the impact of managers’R&D expenditures on the firm’s long－term performance to connect it with stock option exercise by managers. As a result, we find that the firms which managers exercised their stock options and their R&D expenditures are above the industry average show significantly larger sales to operating profit ratio and market to book ratio for the following three years after stock options are exercised. This tells us that CEO stock option awards provide incentives to rise firms’ long－term performances, and the managers evidence the effort with the increase of their R&D expenditures. Against the recent dispute regarding the actual effectiveness and necessity of stock option awards, our results demonstrate that stock options still show positive impact on the firm performance, implying stock option systems can still be usefully applied to drive better corporate long－term performances if they are properly implemented to be goal－directed.
Keywords
- Stock option
- R&D expenditures
- Long－term performance
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