Beginning of Stock Option-Based Compensation in Japan: A Test of Alternative Theories

Journal of Financial Management and Analysis, Vol. 21, No. 2, July-December 2008

Posted: 8 May 2009

See all articles by Dr. Hamid Hassan

Dr. Hamid Hassan

FAST Business School

Yasuo Hoshino

Aichi University - Graduate School of Accounting; University of Tsukuba - Graduate School of Systems and Information Engineering

Date Written: March 24, 2009

Abstract

Japanese companies are increasingly adopting stock option based compensation for executives and employees as a part of their efforts to regain profitability and capital market orientation after the burst of bubble economy. To analyze the economic justifications of option grants in Japanese companies, we use the framework of three different theories i.e., agency theory, retention and sorting model, and the financial and ownership structure of a firm. We use a cross sectional data of 12,896 firm-year observations of 1,612 listed companies of Tokyo Stock Exchange from the year 1997 to 2004. While, the agency theory fairly succeeds in defining the executive stock options, the employees’ stock options are most consistent with the explanation of the retention and sorting motives. Determinants of the financial and ownership structure show mix results.

Keywords: Stock options, Retention and sorting, Agency theory, Japan

JEL Classification: C52, G14, G34, O53, O57

Suggested Citation

Hassan, Hamid and Hoshino, Yasuo, Beginning of Stock Option-Based Compensation in Japan: A Test of Alternative Theories (March 24, 2009). Journal of Financial Management and Analysis, Vol. 21, No. 2, July-December 2008. Available at SSRN: https://ssrn.com/abstract=1394339

Hamid Hassan (Contact Author)

FAST Business School ( email )

B- Block, Faisal Town
Lahore, Punjab 54770
Pakistan

Yasuo Hoshino

Aichi University - Graduate School of Accounting ( email )

2-10-31 Tsutsui Higashi-ku
Higashi-ku
Nagoya, Aichi 461-8264
Japan
+81-52-937-8264 (Phone)
+81-52-937-8264 (Fax)

HOME PAGE: http://leo.aichi-u.ac.jp/~hoshino/English.html

University of Tsukuba - Graduate School of Systems and Information Engineering

Ibaraki, 305-8573
Japan

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