Are Stock Option Grants to Directors of State-Controlled Chinese Firms Listed in Hong Kong Genuine Compensation?

50 Pages Posted: 24 Aug 2008 Last revised: 21 Feb 2013

Zhihong Chen

Hong Kong University of Science and Technology

Yuyan Guan

City University of Hong Kong (CityUHK)

Bin Ke

National University of Singapore

Date Written: January 19, 2013

Abstract

We examine the determinants and consequences of stock option compensation to directors of state-controlled Chinese firms that are incorporated outside China and listed in Hong Kong, referred to as state-controlled Red Chip firms, over the period 1990-2005. We find that state-controlled Red Chip firms granted directors a significant number of stock options in response to the demand of foreign investors. However, state-controlled Red Chip firms forced the directors to forfeit a significant percentage of their vested in-the-money stock options due to a conflict between the high-powered stock option compensation and state-controlled Red Chip firms’ unique managerial labor market. We find little evidence that directors’ stock option compensation changed the behavior of state-controlled Red Chip firms. Overall, our results are consistent with the media’s allegation that the stock options granted to directors of many, if not all, state-controlled Red Chip firms are not genuine compensation.

Keywords: China, shareholder value, stock option compensation, corporate governance, state-controlled firms

JEL Classification: D21, G32, J33, M40, N25

Suggested Citation

Chen, Zhihong and Guan, Yuyan and Ke, Bin, Are Stock Option Grants to Directors of State-Controlled Chinese Firms Listed in Hong Kong Genuine Compensation? (January 19, 2013). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1249526 or http://dx.doi.org/10.2139/ssrn.1249526

Zhihong Chen

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong
Hong Kong
(852)-2358-7574 (Phone)
(852)-2358-1693 (Fax)

Yuyan Guan

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
852-34427136 (Phone)

Bin Ke (Contact Author)

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-54
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

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