Does stock options plan really matter on the Malaysian firm performance?

  • Zuriadah Ismail Faculty of Management and Economics, Universiti Pendidikan Sultan Idris, Tanjong Malim, Perak, Malaysia
  • Everton Dockery Portsmouth Business School, University of Portmouth, United Kingdom
  • Anis Suriati Ahmad Faculty of Management and Economics, Universiti Pendidikan Sultan Idris, Tanjong Malim, Perak, Malaysia
Keywords: Stock Option plan, Firm performance

Abstract

This paper examines the effect of stock options plan on firm performance. By using a multivariate regression analysis on 58 Malaysian listed firms with stock option plan, the main finding shows that granting stock option plans do not entirely lead to improvements over firm performance in Malaysia. From this result may spur a debate about the role stock option plans play in enhancing firm performance as in the few years that stock options have been in use in Malaysia, stock option plans gained popularity. But at the same time manipulation in accounting measures such as creative accounting and earnings management, has led the public to question the practicality in adopting stock option plans at least for reducing agency problems.

Downloads

Download data is not yet available.

References

Abdelaziz, E.M., Amine, L., & Lanour, C. (2011). Stock options and the performance of CAC40 listed companies.
International Journal of Economics and Finance, 3(1), 218-228.

Abdul Rahman, R., & Mohamed Ali, F.H. (2006). Board, audit committee, culture and earnings management:
Malaysian evidence. Managerial Auditing Journal, 21(7), 783–804.

Aboody, D. (1996). Market valuation of employee stock options. Journal of Accounting and Economics, 22, 357-391.

Aboody, D., & Kasznik, R. (2000). CEO stock option awards and the timing of corporate voluntary disclosures.
Journal of Accounting and Economics, 29, 73-100.

Anderson, R.C., & Reeb, D.M. (2003). Founding-family ownership and firm performance: Evidence from the S&P
500. The Journal of Finance 58(3), 1301-1327.

Ariff, M., Shamsher, M., & Nasir, A.M. (1998). Stock pricing in Malaysia: Corporate financial and investment
management. Universiti Putra Malaysia Press: Serdang.

Bebchuk, L., & Fried, J. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17,71-92.

Bebchuk, L., & Grinstein, Y. (2005). The growth of executive pay. Oxford Review of Economic Policy, 21(2), 283-303.

Beiner, S., Drobetz,W., Schmid, F. & Zimmermann, H. (2004). Is board size an independent corporate governance
mechanism? Kyklos, 57, 327–356.

Bettis, J.C., Bizjak, J.M., & Lemmon, M.L. (2005). Exercise behaviour, valuation and the incentive effects of
employee stock options. Journal of Financial Economics 76(2). 445-470.

Bhagat, S., & Black, B.S. (2001). The non-correlation between board independence and long-term firm
performance. Journal of Corporation Law, 27,231-274.

Black, B.S., Jang, H., & Kim, W. (2002). Does Corporate Governance Affect Firm value? Evidence from Korea (Working Paper No.237). Standford Law School.

Blasi, J., Freeman, R., Mackin, C., & Keuse, D. (2010). Creating a bigger pie? The effects of employee ownership, profit sharing and stock options on workplace performance, shared capitalism at work: employee ownership, profit and gain sharing and broad-based stock options. Doughlas Kruse, Richard Freeman and Joseph Blasi (Ed.). Chicago: University of Chicago Press.

Brickley, J., Bhagat, S. & Lease, R. (1985). The impact of long-range managerial compensation plans on
shareholder wealth. Journal of Accounting and Economics, 115-129,

Brook, C. (2008). Introductory Econometrics for Finance (2nd Edn). Cambridge: UK

Brown, S., & Warner, J. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14, 3-31.

Bulan, L.P., Sanyal, P., & Yan, Z. (2010). A few bad apples: An analysis of CEO performance pay and firm
productivity. Journal of Economics and Business, 62, 273-306.

Bushman, R. M., & Indjejikian, R. J. (1993). Accounting income, stock price, and managerial compensation.
Journal of Accounting and Economics, 16(1-3), 3-23.

Carpenter, J.N. (1998). The exercise and valuation of executive stock option. Journal of Financial Economics, 48, 127- 158.

Cheung, Y.L., Rau, P.R. & Stouraitis, A. (2006). Tunnelling, propping and expropriation: evidence from
connected party transactions in Hong Kong. Journal of Financial Economics 82,343-386.

Chourou, L., Abaoub, E., & Saadi, S. (2008). The economic determinants of CEO stock option compensation.
Journal of Multinational Financial Management, 18(1), 61-77.

Claessens, S., Djankov, S., & Lang, L.H.P. (2000). The separation of ownership and control in East Asian
Corporations. Journal of Financial Economics, 58, 81-112.

Cohen, J.W. (1988). Statistical power analysis for the behavioral sciences (2nd edn). Hillsdale, NJ: Lawrence Erlbaum Associates.

Cohen, R. B., Hall B. J., & Viceira, L. M. (2000), Do Executive Stock Options Encourage Risk- Taking? (Working
Paper). Harvard Business School.

Coles, J.L., Daniel, N.D., & Naveen, L. (2005). Boards: Does one size fit all? (Working paper). Arizona State
University.

Conyon, M.J., & Leech, D. (1994). Top pay, company performance and Corporate Governance. Oxford Bulletin of
Economics and Statistics, 56 (3), 229-247.

Core, J., Holthausen, R., & Larker, D. (1999). Corporate governance, chief executive officer compensation and
firm performance. Journal of Financial Economics, 51, 371-406.

Core J.E., & Guay, W.R. (2001). Stock option plans for non-executive employees. Journal of Financial Economics, 61
(2). 253-287.

Cosh, A., & Hudges, A. (1997). Executive remuneration, executive dismissal and institutional shareholdings.
International Journal of Industrial Organization, 15, 469-492.

Coughlan, A., & Schmidt, R. (1985). Executive compensation, management turnover and firm performance.
Journal of Accounting and Economics, 7 (1-3),43-66.

Dechow, P.M., Sloan, R.G., & Sweeney, A.P. (1996). Causes and consequences of earnings manipulation: An
analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13, 1-36.

Defond, M.L., & Hung, M. (2004). Investor protection and corporate governance: Evidence from Worldwide CEO
Turnover. Journal of Accounting Research, 42(2), 269-312.

DeFusco. R., Johnson, R., & Zorn, T. J. (1990). The effect of executive stock option plans on stockholders and
bondholders. Journal of Finance, 45(2), 617-627.

Ding, D.K., & Sun, Q. (2001), Causes and effect of stock option plans: Evidences from Singapore, Pacific-Basin
Finance Journal, 9, 563-599.

Duffhues, P., Kabir, R., Mertens, G., & Roosenboom, P. (2003). Employee stock option grants and firm
performance in the Netherlands. Bedrijsskunde, 75, 667-678.

Duffhues P., & Kabir, R. (2008). Is the pay-performance relationship always positive? Evidence from the
Netherlands. Journal of Multinational Financial Management, 1, 45-60.

Fich, E., & Shivdasani, A. J. (2005). The impact of stock-option compensation for outside directors on firm value.
Journal of Business, 78 (6), 2229-2254.

Gaver, J., & Gaver, K. (1993). Additional evidence on the association between the investment opportunity set and
corporate financing, dividend, and compensation policies. Journal of Accounting and economics, 16, 125–160.

Gerety, M., Hoi, C. K., & Robin, A. (2001). Do shareholders benefit from the adoption of incentive pay for
directors? Financial Management, 30, 45–61.

Gibson, M.S. (2003). Is corporate governance ineffective in emerging market? Journal of Financial and Quantitative Analysis, 38, 231-250.

Hafiza Aishah, H. & Susela D. (2009). Board characteristics, ownership structure and earnings quality: Malaysian
evidence. Research in Accounting in Emerging Economies 8, 97 – 123.

Haleblian, J., & Finkelstein, S. (1993). Top management team size, CEO dominance, and firm performance: The
moderating roles of environmental turbulence and discretion. The Academy of Management Journal, 36 (4), 844-
863.

Hanlon, M., Rajgopal, S., & Shevlin, T.J. (2003). Are executive stock options associated with future earnings?
Journal of Accounting and Economics, 36 (1-3), 3-43.

Haniffa, R.M., & Cooke, T.E. (2002). Culture corporate governance and disclosure in Malaysian corporations.
Abacus, 38,317-349.

Haniffa, R.M., & Hudaib, M. (2006). Corporate governance structure and performance of Malaysian listed
companies. Journal of Business Finance and Accounting, 33 (7-8), 1034-1062.

Harrel, F.E. (2001). Regression Model Strategies: With Application to Linear Models, Logistic Regression and Survival Analysis. USA: Springer.

Hassan, H., & Hoshino, Y. (2007). The performance impacts of stock options in Japan. Japanese Journal of
Administrative Science, 20, 27-41.

Hillegeist, S. A., & Penalva, F. (2004). Stock Option incentives and firm performance (Working Paper No 535). IESE
Business School, University of Navarra.

Hochberg, Y., & Linsey, L. (2010). Incentive, targeting and firm performance: An Analysis of Non-executive stock
options: An Analysis of non-executive stock options. Review of Financial Studies, 23, 4148-4186.

How, J., Jelic, R., Saadouni, B., & Verhoeven, P. (2007). Share allocations and performance of KLSE second board
IPOs. Pacific-Basin Finance Journal, 15(3), 292-314.

Hutchinson, M. (2003). An analysis of the association between firm risk, executive share options and accounting
performance: some Australian evidence. Review of Accounting and Finance, 2 (3), 48 – 71.

Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: managerial behaviour, agency costs and ownership
structure. Journal of Financial Economics, 3(4), 305-360.

Kahle, K. M., & Shastri, K. (2005). Firm performance, capital structure, and the tax benefits of employee stock
options. Journal of Financial and Quantitative Analysis, 40(1), 135-160.

Kang, J. K., & Shivdani, A. (1996). Does the Japanese governance system enhance shareholder wealth? Evidence
from the stock price effects of top management turnover. The Review of Financial Studies, 9, 1061-1095.

Kang, J.K. (2002). Handbook on company secretarial practice in Malaysia (3rd Edition). Kuala Lumpur: Lexis Nexis
Business Solutions.

Kaplan, S.N. (1994). Top executive rewards and firm performance: A comparison of Japan and the United States.
Journal of Political Economy, 102 (3), 510-546.

Kaplan S.N. & Minton, B.A. (2008). How has CEO turnover changed? Increasingly performance sensitive boards and increasingly uneasy CEOs (NBER Working Papers 12465). National Bureau of Economic Research.

Kato, H.K., Lemmon, M., Luo, M., & Schallheim, J. (2005). An empirical examination of the costs and benefits of
executive stock options: Evidence from Japan. Journal of Financial Economics, 78(2), 435-461.

Kedia S., & Mozumdar, A. (2002). Performance impact of employee stock options retrieval in
http://ssrn.com/abstract=384188. AFA 2003 Washington D.C. Meetings

Klein, A. (2002). Audit Committee, Board of Director Characteristics, and earnings management. Journal of
Accounting and Economics, 33 ( 3 ), 375–400.

Kim, N. J. (1990). Do long-term incentive plans matter? Business Forum, 15(2), 15.

Kole, S. (1997). The complexity of compensation contracts. Journal of Financial Economics, 43(1). 79-104.

Lambert, R., Larcker, D., & Verrecchia, R. (1991). Portfolio considerations in valuing executive compensation.
Journal of Accounting Research, 29, 129-149.

Landsman, W., Lang, M., & Yeh, S. (2007). Governance and the Split of Options between Executive and Nonexecutive Employees. Journal of Accounting Auditing and Finance, 22 (2), 109-138.

Langmann, C. (2007). Stock Market Reaction and Stock Option Plans: Evidence from Germany. SBR (59), 85-106.
La Porta, R., De-Silanes, F.I., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance LIV
(2), 471-517.

Larker, D.F. (1983). The association between performance plan adoption and corporate capital investment. Journal of Accounting and Economics, 5, 3-30.

Lausten, M. (2002). CEO turnover, firm performance and corporate governance: Empirical evidence on Danish
firms. International Journal of Industrial Organization, 20, 319-414.

Lehman, E.L. (1975). Nonparametrics: Statistical Methods Based On Ranks. Holden-Day: San Francisco.

Leonhardt, D. (April 19, 2000). Technology share downturn diminishing stock options. The New York Times, p.C1.

Lie, E. (2005). On the Timing of CEO Stock Option Awards. Management Science 51 (5), 802-812.

Lipton, M., & Lorsch, J.W. (1992).A modest proposal for improved corporate governance. Business Lawyer 48,
59–77.

Ittner, C.D., Lambert, R.A., & Larcker, D. F. (2003). The structure and performance consequences of equity grants
to employees of new economy firms. Journal of Accounting and Economics, 3, 89–127.

Mehran, H. (1995). Executive compensation structure, ownership and firm performance. Journal of Financial
Economics, 38, 163-184.

Morck, R., Shleifer, A. & Vishny, R.W. (1989). Alternative mechanisms for corporate control. The American
Economic Review, 79 (4), 842-52.

Moscu, R.G. (2013). Does CEO duality really affect corporate performance? International Journal of Academic
Research in Economics and Management Science, 2(1), 156-166.

Nagaoka, S. (2005). Determinants of the introduction of stock options by Japanese firms: Analysis from the
incentive and selection perspectives. Journal of Business, 78 (6), 2289-2315.

Obiyathulla, I. B., Sharifah Raihan S, M. Z., Mohd Eskandar S.M.R. & Azhar M. 2009. Granting employee stock
options (ESOs), market reaction and firm performance. Asian Academy of Management Journal of Accounting
and Finance,5 (1), 117–138.

Oyer, P. (2004). Why do firms use incentives that have no incentive effects? The Journal of Finance, 59(4), 1619-
1649.

Ozkan, N. (2009). CEO compensation and firm performance: An empirical investigation of UK panel data.
European Financial Management, 17,260-285

Pallant, J. (2011). SPSS Survival Manual: A Step by step guide to data analysis using SPSS. McGraw-Hill International: NSW, Australia.

Pandher, G.S. (2003). Valuation of stock option grants under multiple severance risks. Journal of Derivatives
11(2).25-37.

Rajgopal, S., & Shevlin, T. (2002). Empirical evidence on the relation between stock option compensation and risk
taking. Journal of Accounting and Economics, 33(2), 145-171.

Renneboog, L. (2000). Ownership, managerial control and the governance of companies listed on the Brussels
stock exchange. Journal of Banking and Finance, 24, 1959–1995

Rubinstein, M. (1995). On the accounting valuation of employee stock options. Journal of Derivatives, 3(1), 8-24.

Salsiah, M.A., Norman, M.S., & Mohamat, S.H. (2008). Ownership structure and earnings management in
Malaysian listed companies: the size effect. Asian Journal of Business and Accounting 1(2), 89-116

Samsa, M.K. & Scheidt, K.S. (2003). International Employee Equity Plans: Participation beyond Border. The Hague:
Kluwer Law International.

Sanders, W. G. (2001). Behavioral responses of CEO's to stock ownership and stock option pay. Academy of
Management Journal, 44, 477-492.

Sanders, W.M. G., & Hambrick. D.C. (2007). Swinging for the fences: The effects of CEO stock options on
company risk taking and performance. Academy of Management Journal 50, 1055-1078.

Sharma, K. (2006). Understanding employee stock options. Global Business Revie, 7 (1), 77-93.

Sesil, J.C., Kroumova, M.K., Blasi, J.R., & Kruse, D. L. (2002). Broad-based employee stock options in U.S. New
economy firms. British Journal of Industrial Relations, 40(2). 273-294.

Smith, G.S., & Swan, P.L. (2008). The road to riches: CEO incentives and firm performance. Retrieved at SSRN:
http://ssrn.com/abstract=1089968

Triki, T., & Ureche-Rangau, L. (2012). Stock options and firm performance: New evidence from the French
Market. Journal of International Financial Management and Accounting, 23 (2), 154–185.

Wan Hussain W.N. (2009). The impact of family-firm structure and board composition on corporate
transparency: evidence based on segment disclosures in Malaysia. The International Journal of Accountin, 44
(4), 313-333.

Yeo, G. H. H., Chen, S. S., Ho, K. W., & Lee, C. (1999). Effects of executive share option plans on shareholder
wealth and firm performance: The Singapore evidence. Financial Review, 34(2), 1-20.

Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial
Economics, 20, 185-213.

Zahiruddin, G. & Fauziah, M.T. (2012). Effective interest alignment mechanism or tool to expropriate: A review
of Malaysian ESOS Adoption, Malaysian Management Journal 16, 59-74.
Published
2017-10-09
How to Cite
Ismail, Z., Dockery, E., & Ahmad, A. S. (2017). Does stock options plan really matter on the Malaysian firm performance?. Journal of Contemporary Issues and Thought, 7, 104-118. https://doi.org/10.37134/jcit.vol7.10.2017