Academic Journals Database
Disseminating quality controlled scientific knowledge

Market Reaction to the Approval of Stock Option Plans: an Event Study of Bovespa Listed Companies

Author(s): Aline Barreto dos Santos | Fernanda Finotti Cordeiro Perobelli

Journal: Revista Brasileira de Finanças
ISSN 1679-0731

Volume: 7;
Issue: 2;
Start page: 163;
Date: 2009;
Original page

Keywords: employee stock option plans | agency problems | event studies

This paper aims to verify market reactions to Employee Stock Options Plans (ESOP) proposals and awards in the Brazilian Stock Exchange from July 1994 to March 2007. In order to achieve such objective, event studies methodology was applied and the original sample (comprised by all companies that adopted ESOP during the survey period) was divided according to employees’ eligibility to ESOP and CEOs bargain power. Using non-parametric tests (Sign Test e Wilcoxon Rank Sum Test), we could verify that announcements of ESOP proposals and ESOP awards were not related to positive abnormal returns. As the opposite, returns around those announcements dates were negatives, in general. Such pattern could be explained by some theoretical consequences of ESOP plans: increase in the CEOs risky behavior, constrains in the dividend policy and CEOs opportunistic behavior by managing the timing of their voluntary disclosures around stock option awards. We also found evidences suggesting that employees´ eligibility is related to abnormal returns. When all employees are awarded, returns are even more negative. Possible explanations are indirect costs of capital pulverization and increase in the companies cost of capital due to the ESOP. Our findings suggest that an ESOP adoption in a poor governance environment can increase agency problems, instead of aligning CEOs and shareholders interests.

Tango Jona
Tangokurs Rapperswil-Jona

     Affiliate Program