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

See all articles by Zhihong Chen

Zhihong Chen

Hong Kong University of Science and Technology

Yuyan Guan

Nanyang Business School, Nanyang Technological University

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

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Bin Ke (Contact Author)

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-53
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

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