Stock Options and Firm Performance: New Evidence from the French Market

• Date: 01 June 2012
• DOI: http://doi.org/10.1111/j.1467-646X.2012.01057.x
• Author: Thouraya Triki,Loredana Ureche‐Rangau
• Published date: 01 June 2012

Stock Options and Firm Performance: New

Evidence from the French Market

Thouraya Triki

Principal Research Economist, Development Research Department, African Development

Bank, Belvedere, 1002, Tunis, Tunisia

e-mail: t.triki@afdb.org

Loredana Ureche-Rangau

Associate Professor of Finance, Universite

´de Picardie Jules Verne, Pole Cathe

´drale, Amiens

Cedex 1, 80027, France

e-mail: loredana.ureche@u-picardie.fr

Abstract

This study investigates the effect of stock option-based compensation on the short-term

and long-term performance of French companies. To the best of our knowledge, we

provide the first empirical evidence describing the market reaction following initiations

and renewals of Employee Stock Option (ESO) plans in France. We find that the

French market reacts positively to initiations of ESO plans but does not consider their

renewal as relevant information. Our results on the long-term effect of ESO plans sug-

gest that neither the size nor the value of the grants affect the firm’s accounting and

market performance. Similarly, corporate performance prior to the grant has no

explanatory power of the size or value of the grant. This implies that, over our sample

period, the relationship between option-based compensation and corporate performance

in France was inexistent, regardless of the direction considered.

1. Introduction

Over the last two decades, a large number of French firms have been

offering stock options to their employees to link their wealth to the

firm’s stock price and, therefore, align their interests with sharehold-

ers’. The use of stock option-based compensation gets its theoretical

foundation in the agency theory developed by Jensen and Meckling

(1976) whereby agency problems arising from the separation of equity

property and company management could be alleviated by variable

compensation. Employee Stock options (ESOs hereafter) are attractive

compensation schemes because their full cost does not show up in

The authors thank an anonymous Referee for extremely valuable comments and suggestions

that significantly improved the quality of the article, Prof. R. Levich, Co-Editor, for an excellent

follow-up of the revision process, Simon Fleurquin and Nicolas Payet for their research assis-

tance in building up the initial database. The usual disclaimer applies.

Journal of International Financial Management & Accounting 23:2 2012

©2012 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

firms’ balance sheets, and accordingly, they do not translate into a one

to one reduction in corporate profits. Moreover, because they do not

involve significant cash outflows, ESO provides financial incentives to

employees without putting pressure on firm’s liquidity. In France, ESO

plans offer companies tax advantages as well.

1

The literature studying the effects of ESO on corporate financial

performance and other corporate policies is dense. Nevertheless, most

of the existing empirical work is focusing on the United States, reflect-

ing mainly available detailed information on ESO. Conversely, only

few studies covered European countries leading to extensive uncer-

tainty about the efficiency of these plans in Europe. For instance, the

literature on stock options in France is rather scant with only a hand-

ful of papers describing compensation policies of French companies

(Desbrie

`res, 1991), assessing the impact of ESO on the financing and

dividend decisions as well as value creation (Poulain-Rehm, 2003),

studying the pay-to-past performance relationship (Lanouar and

Elmarzougui, 2007), and scrutinizing the impact of ESO on the firm’s

medium-term performance (Hamouda, 2006 and Idi Cheffou, 2007).

The poor coverage of European markets makes it difficult to compare

the efficiency of ESO plans in the United States and Europe, and to

assess whether the reported evidence on ESO-based compensation is

US specific.

The objective of this article is to help fill this gap in the literature

by providing new evidence on the effect of ESO-based compensation

on corporate performance in France. Our contribution to the literature

is threefold. First, we study both the short-term and long-term effects

of ESO-based compensation on corporate performance. To the best of

our knowledge, we provide the first empirical evidence assessing the

market reaction surrounding announcements of ESO plans in France.

Second, we disaggregate between initiations and renewals of ESO plans

when studying the stock market reaction. Third, we use a longer time

horizon to assess the long-term effects of ESO plans than Hamouda

(2006) and Idi Cheffou (2007) to account for the fact that ESO plans

may take time to produce results.

Our interest in the French market is motivated by the increasing

share of ESO-based compensation in total compensation of French

employees, and the heated debate surrounding the efficiency of these

schemes in France. According to the magazine “L’Expansion”, poten-

tial gains generated by ESO plans to French employees in 2007 stood

at almost 1 billion Euros,

2

while a study published by Cegos in 2004

Stock Options and Firm Performance 155

©2012 Blackwell Publishing Ltd

estimates that 80 per cent of French companies composing the CAC

40 index use ESO. Similarly, a report published in 2003 by the French

National Assembly shows that the share of ESO-based revenues in the

total compensation of French managers is the highest in Europe and is

comparable to the one reported for the United States. Commonly,

ESO-based compensation represents twice the amount of the annual

salary of the beneficiary. Those statistics suggest that France is one of

the most generous European countries in terms of ESO offering, which

makes the assessment of these plans’ efficiency very relevant.

Studying the French market is also of interest for regulatory

purposes. The French government has been reviewing consistently the

regulation governing ESO grants, often to make them more difficult.

For instance, the MEDEF (employers’ union organization in France)

presented in 2008 a code of good governance aimed at strengthening

supervision of ESO compensation. Similarly, since 2009, French com-

panies have been prohibited from offering ESO plans unless their

entire staff can benefit from the plan or from equivalent Long-Term

Incentive Plans (LTIP). This regulation was justified by the reported

abusive behavior of several French top managers including Noe

¨l

Forgeard, the CEO of EADS, who made a capital gain of €8.4 million

from ESO while the stock price of his company was sinking and a plan

of 10,000 layoffs was announced. Similarly, Philippe Jaffre

´(Elf), Jean-

Marie Messier (Vivendi-Universal), Daniel Bernard (Carrefour),

Antoine Zacharias (Vinci), Jean-Marc Espalioux (Accor), and Serge

Tchuruk (Alcatel) were all criticized for cashing millions of Euros

while their companies were performing poorly. More recently, the

French government qualified an ESO grant made by Socie

´te

´Ge

´ne

´rale

as indecent given the current economic downturn. Hence, reporting

evidence showing the absence of a significant relationship between

ESO-based compensation and corporate performance would support

the argument that regulation governing these schemes needs further

strengthening to prevent abuses.

3

Our results show that the French market reacts positively to initia-

tions of ESO plans while the market reaction is not statistically signifi-

cant for plans renewals. These findings are consistent with the agency

theory and previous empirical evidence reported for the Asian and US

markets (see DeFusco et al., 1990; Ding and Sun, 2001; Langmann,

2007 among others). We also find that firms trading on the cash mar-

ket experience a larger market reaction than those trading on the

monthly settlement segment of the Paris Stock Exchange, reflecting a

156 Thouraya Triki and Loredana Ureche-Rangau

©2012 Blackwell Publishing Ltd