The Effects of Non‐Expensed Employee Stock Bonus on Firm Performance: Evidence from Taiwanese High‐Tech Firms

Publication Date01 March 2016
AuthorMing‐Yuan Chen,Nien‐Chi Liu,Mei‐Ling Wang
DOIhttp://doi.org/10.1111/bjir.12051
The Effects of Non-Expensed Employee
Stock Bonus on Firm Performance:
Evidence from Taiwanese
High-Tech Firms
Nien-Chi Liu, Ming-Yuan Chen and
Mei-Ling Wang
Abstract
The choice of whether to expense broad-based stock incentives has been a highly
controversial debate in both academic research and practice circles. We provide
insightful findings to reconcile certain debates regarding the effectiveness
of non-expensed, broad-based stock incentives. Using a unique longitudinal
dataset from Taiwanese high-tech firms over the 1997–2008 period, our results
indicate that non-expensed employee stock bonus incentives exerted positive
effects on short-term organizational value added creation. The dilution effects
of broad-based stock incentives in Taiwan, however, exerted a negative influ-
ence on profitability and eroded share return. The negative effects were even
more severe in the following year, and overexploitation of employee stock bonus
also damaged the long-term organizational performance of Taiwanese high-
tech firms. This negative aspect of non-expensed employee stock incentives
resulted in more evidence for changing the regulatory context of broad-based
stock incentives in Taiwan.
1. Introduction
For more than two decades, firms have used employee equity participation as
a primary incentive mechanism to motivate employees and to enhance firm
performance (Blasi and Kruse 2006; Blasi et al. 2008; Kruse 2002). Firms
with high capital investments in information technology software and hard-
ware rely intensively on stocks and options as incentive schemes to align
Nien-Chi Liu and Ming-Yuan Chen are at National Central University. Mei-Ling Wang is at
Tamkang University.
© John Wiley & Sons Ltd/London School of Economics 2014. Published by John Wiley & Sons Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
British Journal of Industrial Relations
54:1 March 2016 0007–1080 pp. 30–54
doi: 10.1111/bjir.12051
employee and employer interests more closely (Ittner et al. 2003; Murphy
2003; Sesil et al. 2002). The stock incentives adopted by these new economy
firms are typically broad-based schemes, in which most firm employees are
eligible to participate (Poutsma et al. 2003). Given the increasing difficulty of
monitoring employees in new economy firms, employee stock incentives are
an efficient alternative mechanism to formal monitoring (FitzRoy and Kraft
1995; Milgrom and Roberts 1995). Based on the agency cost argument,
employee stock incentives allow these firms to motivate employees (Core and
Guay 2001), attract and retain employees (Oyer and Schaefer 2005), enhance
organizational productivity (Sesil et al. 2002), and promote entrepreneurial
behaviour (Blasi et al. 2003). Thus, broad-based stock incentives are typically
expected to increase a firm’s operational and financial performance
(Hochberg and Lindsey 2010; Sesil et al. 2002).
However, because incentive schemes in Taiwan have received favourable
accounting treatment, certain firms have overexploited them and granted
excessive broad-based stock incentives. The perception of lower cost may
become the primary reason why firms choose such stock incentives, and these
‘cost free’ perceptions may lead to the abuse of such employee stock incen-
tives (Hall and Murphy 2003). Mimetic or normative forces may cause firms
to adopt employee stock incentives that mismatch a firm’s monitoring
context (Brandes et al. 2005). Therefore, possible abuse and the dilution
effects of broad-based equity incentives have persisted as shareholder con-
cerns (Walters and Young 2008).
Are employee stock incentives beneficial to firm financial performance,
and to what extent will unrecognized expenses of employee stock incentives
influence firm profitability and market reaction? These controversial debates
call for more substantive empirical analysis to explain and respond to the
effects of stock incentives that high-tech industries have created. Although
prior studies have supported the view that employee equity incentives
improve firm performance (Hochberg and Lindsey 2010; Kruse 2002;
Sesil et al. 2002), empirically examining the overall performance effects of
employee stock incentives that operate under favourable accounting rules
remains worthwhile.
We contribute to the literature by examining the relation between non-
expensed employee stock incentives and various measures of organizational
performance. We empirically analyse this relationship by using a unique
longitudinal dataset from publicly traded, high-tech firms in Taiwan, where
the non-expensed employee stock incentives have a relatively loose vesting
period regulation. Taiwanese high-tech firms have mostly used employee
stock bonuses (ESB), rather than employee stock options, to share wealth
with their employees. ESB plans share similar attributes with employee stock
options, which are widely applied in new economy firms in the United States.
Until 2008, favourable accounting regulations did not require firms to rec-
ognize the expense of ESB plans. Distributing ESB to employees has been
accomplished using newly issued stocks, which may lead to dilution effects.
Taiwanese ESB incentives typically have short vesting period requirements,
© John Wiley & Sons Ltd/London School of Economics 2014.
Effects of Non-Expensed Employee Stock Bonus on Firm 31

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