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Granting employee stock options (ESOs), market reaction and financial performance

This paper examines several issues related to the implementation of ESOs among Malaysian companies. We examine a total of 52 companies, 26 ESO firms and their matched industry peers over a span of 12 years. We find ESO firm stocks to have marginally higher mean returns and lower volatility than do t...

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Main Authors: Bacha, Obiyathulla Ismath, Syed Mohd Zain, Sharifah Raihan, Mohd Rasid, Mohd Eskandar Shah, Mohamad, Azhar
Format: Article
Language:English
Published: Asian Academy of Management and USM Press 2009
Subjects:
H Social Sciences (General)
HG Finance
Online Access:http://irep.iium.edu.my/8011/1/Granting_employee_stock_options_%28ESOs%29%2C_market_reaction_and_financial_performance.pdf
http://irep.iium.edu.my/8011/
http://web.usm.my/journal/aamjaf/Vol%205-1-2009/5-1-6.pdf
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spelling my.iium.irep.80112013-01-13T10:40:11Z http://irep.iium.edu.my/8011/ Granting employee stock options (ESOs), market reaction and financial performance Bacha, Obiyathulla Ismath Syed Mohd Zain, Sharifah Raihan Mohd Rasid, Mohd Eskandar Shah Mohamad, Azhar H Social Sciences (General) HG Finance This paper examines several issues related to the implementation of ESOs among Malaysian companies. We examine a total of 52 companies, 26 ESO firms and their matched industry peers over a span of 12 years. We find ESO firm stocks to have marginally higher mean returns and lower volatility than do their pre-ESO peers. Malaysian companies are more likely to initiate ESOs when the market valuation of their stocks is low. If there is any timing, ESO initiation is timed to be most favourable to employee recipients. Market reaction to ESO announcements is significantly negative. Furthermore, stock prices do not seem to recover to pre-announcement levels during at least the subsequent 20 trading days or one calendar month. In line with US findings, operating performance deteriorates for ESO companies. Comparative analysis of control firms rules out industry or external factors as elements of the deterioration. Firm size has been identified in previous studies as a determinant of market reaction and post-ESO performance. Indeed we find this to be the case for Malaysian ESOs. We find a positive announcement effect for large firms but a significantly negative one for small firms. Though puzzling, the market reaction makes sense when we consider the poor operating performance post-ESO of small firms relative to large ones. It appears that the impact of an ESO is negative for small firms but neutral for large ones. The market appears to anticipate this outcome and react accordingly. An ESO realigns the interest of the stakeholders of a company. Employee recipients gain, while shareholders mostly lose. Bondholders of large ESO firms are only marginally affected, but those of small firms stand to lose from the diminution of profits and increased leverage post-ESO. Based on our results, it will be difficult to make a case that the objectives of and rationale for an ESO are being fulfilled. Asian Academy of Management and USM Press 2009 Article REM application/pdf en http://irep.iium.edu.my/8011/1/Granting_employee_stock_options_%28ESOs%29%2C_market_reaction_and_financial_performance.pdf Bacha, Obiyathulla Ismath and Syed Mohd Zain, Sharifah Raihan and Mohd Rasid, Mohd Eskandar Shah and Mohamad, Azhar (2009) Granting employee stock options (ESOs), market reaction and financial performance. Asian Academy of Management Journal of Accounting and Finance, 5 (1). pp. 117-138. http://web.usm.my/journal/aamjaf/Vol%205-1-2009/5-1-6.pdf
institution Universiti Islam Antarabangsa Malaysia
building IIUM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider International Islamic University Malaysia
content_source IIUM Repository (IREP)
url_provider http://irep.iium.edu.my/
language English
topic H Social Sciences (General)
HG Finance
spellingShingle H Social Sciences (General)
HG Finance
Bacha, Obiyathulla Ismath
Syed Mohd Zain, Sharifah Raihan
Mohd Rasid, Mohd Eskandar Shah
Mohamad, Azhar
Granting employee stock options (ESOs), market reaction and financial performance
description This paper examines several issues related to the implementation of ESOs among Malaysian companies. We examine a total of 52 companies, 26 ESO firms and their matched industry peers over a span of 12 years. We find ESO firm stocks to have marginally higher mean returns and lower volatility than do their pre-ESO peers. Malaysian companies are more likely to initiate ESOs when the market valuation of their stocks is low. If there is any timing, ESO initiation is timed to be most favourable to employee recipients. Market reaction to ESO announcements is significantly negative. Furthermore, stock prices do not seem to recover to pre-announcement levels during at least the subsequent 20 trading days or one calendar month. In line with US findings, operating performance deteriorates for ESO companies. Comparative analysis of control firms rules out industry or external factors as elements of the deterioration. Firm size has been identified in previous studies as a determinant of market reaction and post-ESO performance. Indeed we find this to be the case for Malaysian ESOs. We find a positive announcement effect for large firms but a significantly negative one for small firms. Though puzzling, the market reaction makes sense when we consider the poor operating performance post-ESO of small firms relative to large ones. It appears that the impact of an ESO is negative for small firms but neutral for large ones. The market appears to anticipate this outcome and react accordingly. An ESO realigns the interest of the stakeholders of a company. Employee recipients gain, while shareholders mostly lose. Bondholders of large ESO firms are only marginally affected, but those of small firms stand to lose from the diminution of profits and increased leverage post-ESO. Based on our results, it will be difficult to make a case that the objectives of and rationale for an ESO are being fulfilled.
format Article
author Bacha, Obiyathulla Ismath
Syed Mohd Zain, Sharifah Raihan
Mohd Rasid, Mohd Eskandar Shah
Mohamad, Azhar
author_facet Bacha, Obiyathulla Ismath
Syed Mohd Zain, Sharifah Raihan
Mohd Rasid, Mohd Eskandar Shah
Mohamad, Azhar
author_sort Bacha, Obiyathulla Ismath
title Granting employee stock options (ESOs), market reaction and financial performance
title_short Granting employee stock options (ESOs), market reaction and financial performance
title_full Granting employee stock options (ESOs), market reaction and financial performance
title_fullStr Granting employee stock options (ESOs), market reaction and financial performance
title_full_unstemmed Granting employee stock options (ESOs), market reaction and financial performance
title_sort granting employee stock options (esos), market reaction and financial performance
publisher Asian Academy of Management and USM Press
publishDate 2009
url http://irep.iium.edu.my/8011/1/Granting_employee_stock_options_%28ESOs%29%2C_market_reaction_and_financial_performance.pdf
http://irep.iium.edu.my/8011/
http://web.usm.my/journal/aamjaf/Vol%205-1-2009/5-1-6.pdf
_version_ 1643606051196502016
score 13.211869

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