RESEARCH: Alternative explanations for the association between market values and stock-based compensation expenditure - 25 March 2010

Sample selection.

Firm and option characteristics that
determine whether the primary motivation for granting options is for
reward or incentive purposes.

Descriptive statistics.

ASSETS_t,
book value of total assets, $’000; EQUITY_t, book
value of total equity, $’000; REVENUE_t, total
operating revenue, $’000; MVE_t, market value of equity
(calculated as average share price for 3 months after year end
multiplied by number of shares outstanding), $’000; OPAT_t,
total operating profit after tax, $’000; OPAT_t−1,
total operating profit after tax (t − 1), $’000; TOTAL_COMP_t,
total CEO compensation, $’000; SHARES_t, number of
common shares outstanding as at year end, $’000; ROA_t,
return on assets; ROE_t, return on equity; AB_PERF_t−1,
abnormal performance (t − 1), calculated using Market Model;
MKT_BK_t−1, market-to-book ratio (t − 1);
ROA_t−1, return on assets (t − 1).

Correlation matrix – all changed in this and
following tables.

P,
average price per share for three months after year end; BVE, book
value of equity per share; NI, net income per share; PREDOPT, estimated
options value per share from 2SLS regression; OPTBS, options value per
share measured using the Black–Scholes model; OPT25%, options value per
share, calculated as 25% of exercise price × no. of options granted.

Summary of the OLS regression coefficients
for the relation between share price and option value measured using the
Black–Scholes valuation model (pooled sample). The coefficients are
based on the following equation: P_it=α_1it+α₂BVE_it+α₃NI_it+α₄OPT_it+σ_it.

P_it,
average price per share for three months after year end; BVE_it,
book value of equity per share; NI_it, net income per
share; OPT_it, options value per share, measured using
the Black–Scholes model.

Summary statistics from the OLS regression
of Black–Scholes option value on instrumental variables (pooled sample).
The coefficients are based on the following equation: OPT_it=β_1it+β₂VOL_it+β₃LIFE_it+β₄INT_it+β₅DIV_it+β₆NOPT_it+β₇BVE_it+β₈NI_it+υ_it.

OPT_it,
options value per share, measured using the Black–Scholes model; VOL_it,
share price volatility – % (for firm i at time t); LIFE_it,
vesting period – grant date till vesting date in years (for firm i
at time t); INT_it, risk-free interest rate – %
(for firm i at time t); DIV_it, expected
dividend yield (for firm i at time t); NOPT_it,
number of options granted per share (for firm i at time t);
BVE_it, book value of equity per share; NI_it,
net income per share.

Summary of the 2SLS regression coefficients
for the relation between share price and option value measured using an
instrumental variables approach (pooled sample and by year). The
coefficients are based on the following equation: P_it=γ_1it+γ₂BVE_it+γ₃NI_it+γ₄PREDOPT_it+ε_it.

P_it,
average price per share for three months after year end; BVE_it,
book value of equity per share; NI_it, net income per
share; PREDOPT_it, estimated options per share, value
from 2SLS regression.

Distribution of firms across reward and
incentive groups based on prior period abnormal performance.

Prior
period abnormal performance = prior period firm-specific stock return
measured using the Market Model.

Summary of the 2SLS regression coefficients
for the relation between share price and option value (prior period
abnormal performance). The coefficients are based on the following
equation: P_it=γ_1it+γ₂BVE_it+γ₃NI_it+γ₄PREDOPT_it+ε_it.

P_it,
average price per share for three months after year end; BVE_it,
book value of equity per share; NI_it net income per
share; PREDOPT_it, estimated options per share, value
from 2SLS regression.

Distribution of firms across reward and
incentive groups based on option exercise price.

Discount,
option exercise price is less than the firm’s share price on grant
date; FMV, option exercise price equals the firm’s share price on grant
date; Premium, option exercise price is greater than the firm’s share
price on grant date.

Summary of the 2SLS regression
coefficients for the relation between share price and option value
(option exercise price). The coefficients are based on the following
equation: P_it=γ_1it+γ₂BVE_it+γ₃NI_it+γ₄PREDOPT_it+ε_it.

P_it,
average price per share for three months after year end; BVE_it,
book value of equity per share; NI_it, net income per
share; PREDOPT_it, estimated options per share, value
from 2SLS regression.

Subsequent performance of firms, groups
based on exercise price splits.

ROA,
return on total average assets; ROE, return on total average equity;
EPS, earnings per share; AB_PERF, abnormal performance, calculated using
Market Model.