none

　Employee’s stock bonus is the prevalent mechanism to reward employees in Taiwan, specifically in high-tech industries. High-tech industries take advantage of employee’s stock bonuses to enhance the attraction and retention of crucial employees and provide superior incentives for employees to enhance the shareholder value. Nevertheless, broad-based use of employee’s stock bonuses can promote job-hopping within the high-tech industries and heavily dilute shareholder wealth.

　In this study we select non-financial TESC listed companies which distributed stock bonus from 1996 to 2003 to examine whether the firms which grant employee’s stock bonus can reduce the agency problem and lower firms’ cost of equity. Our empirical results indicate employee’s stock bonus have a positive effect on the cost of equity when we regard historical stock returns as a proxy for the cost of equity. However, we can not get consistent results with above when we use the estimates from the Ohlson-Juettner Model and Modified PEG Ratio Model.

Additionally, the results show that employee’s stock bonus provides more incentive effect to the firms with more agency problems when we divide our sample based on information transparency, and shareholding of institutional investor. Because Taiwanese listed companies are typical of family-controlled companies, the empirical results may result the bias when we test how the agency cost of shareholding of directors and supervisors affect the relation between employees’ stock bonus and the cost of equity.

[1] Aboody, David, 1996, Market valuation of employee stock options, Journal of
Accounting and Economics 22(1-3), 357-392.
[2] Agrawal, Anup, and Gershon N. Mandelker, 1987, Managerial Incentives and
Corporate Investment and Financing Decision, Journal of Finance 4, 823-837.
[3] Akhigbe, Aigbe, Jeff Madura, and, Alan L. Tucker, 1995, Reexamining the
link between executive compensation and corporate performance: A note,
American Business Review 13, 2-83.
[4] Banz, Rolf W., 1981, The relationship between return and market value of
common stocks, Journal of Financial Economics 9, 3-18.
[5] Bizjak, John, Brickley James, and Jeffrey Coles, 1993, Stock-based
incentive compensation and investment behavior, Journal of Accounting and
Economics 16, 349-372.
[6] Black, Bernard, Hasung Jang, and Woochan Kim, 2000, Does corporate
governance affect firm market value? Evidence from Korea, Working paper.
[7] Brickley, James A., Sanjai Bhagat, and Ronald C. Lease, 1985, The impact of
long-term managerial compensation plans on shareholder wealth, Journal of
Accounting and Economics 7,115-129.
[8] Carpenter, Jennifer N., 2000, Does option compensation increase managerial
risk appetite? Journal of Finance 55, 2311–2331.
[9] Chen, Jian, 2001, Ownership structure as corporate governance mechanism:
Evidence from Chinese listed companies, Economics of Planning 34, 53-72.
[10] Chen, Kevin C.W., Zhihong Chen, and K.C. John Wei, 2004, Corporate
governance, agency costs, and expected stock returns: Evidence from
analysts’earnings forecasts, Working paper.
[11] Chiang, Hsiang-tsai, 2005, An empirical study of corporate governance and
corporate performance, Journal of American Academy of Business 6, 95-101.
[12] Core, John, and Wayne Guay, 2001, Stock Options for Non-executive
Employees, Journal of Economics, 61, 253-287.
[13] Coughlan, Anne, and Ronald Schmidt, 1985, Executive Compensation,
Management Turnover, and Firm Performance, Journal of Accounting and
Economics 7, 43-66.
[14] DeFusco, Richard A., Zorn Thomas S., and Robert R. Johnson, 1991, The
association between executive stock option plans changes and managerial
decision making, Financial Management 20, 36-43.
[15] Demsetz, Harold, and Kenneth Lehn, 1985, The structure of ownership:
Causes and consequences, Journal of Political Economy 93, 1155–1177.
[16] Diamond, Douglas W., and Robert E. Verrecchia, 1991, Disclosure, liquidity
and the cost of capital, Journal of Finance 46, 1325-1359.
[17]Drobetz, Wolfgang, Schillhofer Andreas, and Zimmermann Heinz, Corporate
governance and expected stock returns: Evidence from Germany, European
Financial Management 10, 267-293.
[18] Easton, Peter, 2004, PE ratios, PEG ratios, and estimating the implied
expected rate of return on equity capital, Accounting Review 79, 73-95.
[19] Fama, Eugene F., and Jensen Michael C., 1983, Separation of ownership and
control, Journal of Law and Economics 26, 301-325.
[20] Fama, Eugene F., and Kenneth French, 1992, The cross-section of expected
stock returns, Journal of Finance 47, 427-465.
[21] Fama, Eugene F., and Kenneth French, 2004, Profitability, growth, and
average returns, CRSP working paper, 558.
[22] Gaber, M., 1985, Management incentives to report forecasts of corporate
earnings, Ph. D. Dissertation, The City University of New York.
[23] Garvey, Gerald T., and Peter L. Swan, 1994, The economics of corporate
governance: Beyond the Marshallian firm, Journal of Corporate Finance 1,
139-174.
[24] Gray, Samuel R., and Albert Cannella, 1997, The role of risk in executive
compensation, Journal of Management 23, 517-540.
[25] Gebhardt, William, Charles Lee, and Bhaskaran Swaminathan, 2001, Toward
an implied cost of capital, Journal of Accounting Research 39, 135-176.
[26] Gode, Dan, and Partha Mohanram, 2003, Inferring cost of capital using the
Ohlson-Juettner model, Review of Accounting Studies 8, 399-431.
[27] Griner, Emmett H., 1995, Corporate performance, stock option compensation,
and measurement error in CEO Pay, Journal of Applied Business Research 12,
1-9.
[28] Guay, Wayne R., 1999, The sensitivity of CEO wealth to equity risk An
analysis of the magnitude and determinants, Journal of Financial Economics
53, 43-71.
[29] Hartzell, Jay C., and Laura T. Starks, 2003 Institutional investors and
executive compensation, Journal of Finance 58, 2351-2374.
[30] Hirshleifer, David, and Yoon Suh, 1992, Risk, managerial effort, and
project choice, Journal of Financial Intermediation 2, 308-345.
[31] Holmstrom, Bengt, and Paul Milgrom, 1994, The firm as an incentive
system,American Economic Review 84, 972-991.
[32] Ittner, Christopher D., Richard A. Lambert, and David F. Larcker, 2003,
The structure and performance consequences of equity grants to
employees of new economy firms, Journal of Accounting and Economics 34,
89-127.
[33] Jensen, Michael, and Kevin Murphy, 1990, Performance pay and
top-management incentives, Journal of Political Economy 98, 225-264.
[34] Jensen, Michael C., and Richard S. Ruback, 1983, The market for corporate
control, Journal of Financial Economics 11, 5-50.
[35] Jensen, Michael, and William Meckling, 1976, Theory of the firm:
Managerial behavior, agency costs, and ownership structure, Journal of
Financial Economics 3, 305–360.
[36] La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shieifer, and Robert
Vishny, 2002, Investor protection and corporate valuation. Journal of
Finance 57(3), 1147-1170.
[37] Lang, Mark h., and Russell J. Lundholm, 2000, Voluntary disclosure and
equity offerings: Reducing information asymmetry or hyping the stock?
Contemporary Accounting Research 17(4), 623-662.
[38] Lintner, John, 1965, The valuation of risky assets and the selection of
risky investments in stock portfolios and capital budgets, The Review of
Economics and Statistics 47, 13-37.
[39] Lombardo, Davide, and Marco Pagano, 2002, Law and equity markets, a
simple model, in Joseph A. McCahery, ed.: Corporate Governance Regimes:
Convergence and Diversity (Oxford University Press, London).
[40] Merhan, Hamid, 1995, Executive compensation structure, ownership, firm
performance, Journal of Financial Economics 38, 163-184.
[41] Meulbroek, Lisa K., 2001, The efficiency of equity-linked compensation:
Understanding the full cost of awarding executive stock options, Financial
Management, Summer, 5-30.
[42] McConnell, John, and Henri Servaes, 1990, Additional evidence on equity
ownership and corporate value, Journal of Financial Economics 27, 595–
612.
[43] Modigliani, Franco, and Merton Miller, 1958, The cost of capital,
corporation finance and the theory of investment, The American Economic
Review 48, 261-297.
[44] Morck, Randall, Andrei Shleifer, and Robert W. Vishny, 1988, Management
ownership and market valuation: An empirical analysis, Journal of
Financial Economics 20, 293–315.
[45] Morgenson, Gretchen, 1998, Stock options are not a free lunch, Forbes
(May),212-217.
[46] Mossin, Jan, 1966, Equilibrium in a capital asset market, Econometrica 34,
768-783.
[47] OECD, (1999) Principles of corporate governance, www.oecd.org
[48] Ohlson, James, and Beate Juettner-Nauroth, 2000, Expected EPS and EPS
growth as determinants of value, Working paper, New York University.
[49] Powell, Thomas C., 1996, How does industry matter? An alternative
empirical test, Strategic Management Journal 17, 323-334.
[50] Rajgopal, Shivaram, and Terry Shevlin, 2002, Empirical evidence on the
relation between stock option compensation and risk taking, Journal of
Accounting and Economics 33, 145-171.
[51] Ross, Stephen A., 2004, Compensation, Incentives, and the Duality of Risk
Aversion and Riskiness, Journal of Finance, 1, 207-225.
[52] Ruland, William, Samuel Tung, and George Nashwa, 1990, Factors associated
with the disclosure of managers' forecasts, The Accounting Review 65, 710- 721.
[53] Sharpe, William, 1964, Capital Asset Price: A Theory of Market Equilibrium
under Conditions of Risk, Journal of Finance 19, 425-442.
[54] Shleifer, Andrei, and Robert Vishny, 1986, Large shareholders and
corporate control, Journal of Political Economy 94, 461-488.
[55] Smith, Cliford, and Ross Watts, 1992, The investment opportunity set and
corporate financing, dividend, and financing policies, Journal of
Financial Economics 32, 262-292.
[56] Smith, Michael, 1996, Shareholder activism by institutional investors:
Evidence from CalPERS, Journal of Finance 51, 227-252.
[57] Spence, Michael, 1973, Job market signaling, Quarterly Journal of
Economics 87, 355-374.
[58] Tricker, R. Ian, 1984, Corporate governance: practices, procedures and
powers in British companies and their boards of directors, Aldershot,
England: Gower Press.
[59] Wong Kie A., and Yek T. Chan, 1991, Shareholdings of board of directors
and corporate performance: Evidence from Singapore, Pacific Basin Capital
Markets Research 11, 221-225.
[60] Yeh, Yin-Hua, Tsun-siou Lee, and Tracie Woidtke, 2001, Family control and
corporate governance: Evidence from Taiwan, International Review of
Finance 2, 21-48.