Are stock option grants to directors of state-controlled chinese firms listed in Hong Kong genuine compensation?

• Main Authors: Guan, Yuyan, Ke, Bin, Chen, Zhihong
• Other Authors: Nanyang Business School
• Format: Article
• Language: English
• Published: 2013
• Subjects: DRNTU::Business::Accounting
• Online Access: https://hdl.handle.net/10356/100562; http://hdl.handle.net/10220/18176
• Institution: Nanyang Technological University

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.