1.1 research question · web view4.3.1 swagerman and terpstra (2009) swagerman and terpstra (2009)...

Evidence from the Netherlands

Master’s Thesis

Erasmus School of Economics

Accounting, Auditing and Control

Author: Robbert A. Hooijmeijer BScStudent number: 302721Thesis supervisor: Dr. C.D. Knoops Place and date: Rotterdam, July 26th, 2011

Changing Remuneration Practices as an Economic Consequence of IFRS 2


ACKNOWLEDGEMENTS

With sufficient grades for all courses, writing this thesis was the last step to complete the master’s program Accounting, Auditing and Control. The knowledge I gained in my master’s has been applied to its fullest in this thesis. During the writing process, I noticed that my interest in the subject of executive compensation was increasing as I progressed in this thesis. Not surprisingly, conducting my own research and finding interesting results boosted my interest and joy even further. The whole process of writing, investigating and discussing with supervisors has been an excited and above all instructive process.

However, I could not have done it without the support of many people, to which I want to express my gratitude. First, I would like to thank Dr. C.D. Knoops, who was my thesis supervisor of the Erasmus University. Dr. Knoops always tries to bring out the best in his students and is always available to answer questions. Thanks for all your help and comments, keeping me motivated and bringing the best out.

Also, I would like to express my gratitude towards the Rotterdam office of KPMG, who facilitated to write my thesis in combination with a thesis internship. Specifically, I would like to thank Aart-Jan van Vliet, who was my mentor at KPMG and showed me around, and my KPMG thesis supervisor Greetje Metsaars for all her useful comments.

I am thankful for having such a supporting family, friends and girlfriend. Besides the financial support from my parents, the moral support is highly appreciated. I would like to thank my girlfriend for her everlasting support and interest in my thesis, which helped me to finish it.

Robbert Abraham Hooijmeijer

Rotterdam, July 31, 2011

Robbert Hooijmeijer | July, 2011 2


Abstract

The introduction of IFRS 2 involved accounting treatments for both stock options and shares to become less favorable in the Netherlands. A possible economic consequence of this new standard is a changing remuneration behavior. However, the research in this thesis is not fixated solely on the impact of IFRS 2, but the Dutch Corporate Governance Code and Article 383 of the Dutch Civil Code are accounted for as well. The findings in this thesis provide supporting evidence that stock option compensation has become less preferred after the adoption of IFRS 2 and the mandatory compliance with the Code in 2004, whereas the same events caused shares and cash bonuses to gain ground. This shows that institutional factors have a decisive influence on the behavior of executives and remuneration practices in companies listed at the Dutch stock exchange.



Table of Contents

CHAPTER 1: INTRODUCTION................................................................................................................................ 7

1.1 RESEARCH QUESTION...............................................................................................................................................91.2 RESEARCH METHOD..............................................................................................................................................101.3 RELEVANCE.........................................................................................................................................................111.4 STUCTURE...........................................................................................................................................................11

CHAPTER 2: COMPENSATION FORMS................................................................................................................ 12

2.1 FIXED SALARY.......................................................................................................................................................122.2 BONUS PAYMENTS................................................................................................................................................122.3 SHARE-BASED PAYMENT.........................................................................................................................................12

2.3.1 Equity-settled share-based payment........................................................................................................132.3.2 Cash-settled share-based payment...........................................................................................................132.3.3 Choice between cash-settled and equity-settled.......................................................................................142.3.4 Share-based payment in the Netherlands.................................................................................................14

2.4 EXPLAINING SHARE-BASED PAYMENT........................................................................................................................142.5 CONCLUSION.......................................................................................................................................................15

CHAPTER 3: INSTITUTIONAL SETTING................................................................................................................ 17

3.1 DASB GUIDELINES BEFORE 2005............................................................................................................................173.1.1 Equity-settled share-based payment........................................................................................................173.1.2 Cash-settled share-based payments.........................................................................................................19

3.2 IFRS 2 GUIDELINES...............................................................................................................................................193.2.1 Equity-settled share-based payment........................................................................................................203.2.2 Cash-settled share-based payment...........................................................................................................223.2.3 Choice between cash-settled or equity-settled.........................................................................................23

3.3 COMPARISON......................................................................................................................................................233.4 DUTCH CORPORATE GOVERNANCE CODE..................................................................................................................243.5 ARTICLE 383 IN BOOK 2, TITLE 9 OF THE DUTCH CIVIL CODE.......................................................................................253.6 SITUATION IN THE U.S...........................................................................................................................................253.7 CONCLUSION.......................................................................................................................................................27

CHAPTER 4: REVIEW OF EMPIRICAL LITERATURE................................................................................................28

4.1 IMPACTING ACCOUNTING NUMBERS.........................................................................................................................284.1.1 Financial position and performance.........................................................................................................284.1.2 Stock price reaction and value relevance..................................................................................................294.1.3 Conclusion................................................................................................................................................30

4.2 US-BASED STUDIES...............................................................................................................................................304.2.1 Feng and Tian (2007)................................................................................................................................314.2.2 Brown and Lee (2007)...............................................................................................................................324.2.3 Carter et al. (2007)...................................................................................................................................344.2.4 Choudhary (2008).....................................................................................................................................36



4.2.5 Conclusion................................................................................................................................................374.3 NETHERLANDS-BASED STUDIES................................................................................................................................38

4.3.1 Swagerman and Terpstra (2009)..............................................................................................................384.3.2 Thesis Kraakman (2010)...........................................................................................................................404.3.3 Conclusion................................................................................................................................................41

4.4 DETERMINANTS FOR REMUNERATION.......................................................................................................................414.4.1 Size...........................................................................................................................................................424.4.2 Performance.............................................................................................................................................424.4.3 Risk...........................................................................................................................................................424.4.4 Growth opportunities...............................................................................................................................434.4.5 Corporate Governance..............................................................................................................................434.4.6 Financial constraints.................................................................................................................................434.4.7 Industries..................................................................................................................................................444.4.8 Ownership................................................................................................................................................444.4.9 Insignificant variables...............................................................................................................................444.4.10 Conclusion..............................................................................................................................................45

CHAPTER 5: RESEARCH DESIGN.......................................................................................................................... 46

5.1 HYPOTHESES DEVELOPMENT...................................................................................................................................465.2 SAMPLE..............................................................................................................................................................485.3 RESEARCH MODEL................................................................................................................................................51

5.3.1 Control variables.......................................................................................................................................515.3.2 Model specification for hypotheses 1 and 2..............................................................................................535.3.3 Model specification for hypotheses 3 and 4..............................................................................................55

5.4 CONCLUSION.......................................................................................................................................................58

CHAPTER 6: RESULTS......................................................................................................................................... 60

6.1 RESULTS ON HYPOTHESIS 1.....................................................................................................................................606.1.1 Descriptive statistics.................................................................................................................................606.1.2 Statistical findings and analysis................................................................................................................616.1.3 Conclusion................................................................................................................................................64

6.2 RESULTS ON HYPOTHESIS 2.....................................................................................................................................646.2.1 Descriptive statistics.................................................................................................................................656.2.2 Statistical findings and analysis................................................................................................................656.2.3 Testing substitution..................................................................................................................................686.2.4 Conclusion................................................................................................................................................70



CHAPTER 7: CONCLUSION.................................................................................................................................. 79

CHAPTER 8: LIMITATIONS AND FUTURE RESEARCH............................................................................................83



8.1 LIMITATIONS........................................................................................................................................................838.2 FUTURE RESEARCH................................................................................................................................................84

REFERENCES...................................................................................................................................................... 85

APPENDIX I: BLACK-SCHOLES FORMULA............................................................................................................ 89

APPENDIX II: SUMMARIZING TABLE OF PRIOR EMPIRICAL LITERATURE..............................................................90

APPENDIX III: THOMSON ONE BANKER DEFINITIONS.........................................................................................94

APPENDIX IV: LIST OF PRIMARY SIC CODES........................................................................................................ 97

APPENDIX V: DESCRIPTIVE STATISTICS ON HYPOTHESIS 1..................................................................................98

APPENDIX VI: STATISTICAL FINDINGS ON HYPOTHESIS 1..................................................................................100

APPENDIX VII: DESCRIPTIVE STATISTICS ON HYPOTHESIS 2..............................................................................103

APPENDIX VIII: STATISTICAL FINDINGS ON HYPOTHESIS 2................................................................................105

APPENDIX IX: DESCRIPTIVE STATISTICS ON SUBSTITUTION TEST HYPOTHESIS 2................................................108

APPENDIX X: STATISTICAL FINDINGS ON SUBSTITUTION TEST HYPOTHESIS 2...................................................110

APPENDIX XI: DESCRIPTIVE STATISTICS ON HYPOTHESIS 3................................................................................113

APPENDIX XII: STATISTICAL FINDINGS ON HYPOTHESIS 3.................................................................................116

APPENDIX XIII: DESCRIPTIVE STATISTICS ON HYPOTHESIS 4..............................................................................119

APPENDIX XIV: STATISTICAL FINDINGS ON HYPOTHESIS 4................................................................................122



Chapter 1: Introduction

Companies can compensate executive board members in several ways. The most traditional way is to

compensate them with a fixed salary. Compensation does not exist solely of fixed salary today. Variable

compensation seems to have become more common (Aboody and Kasznik, 2009, p. 125). The amount of

variable compensation depends on the performance of the company and/or the person himself. One

form of variable compensation is share-based payment. In share-based payment employees receive an

amount of compensation dependent on the share performance of the company. Employees receive

either equity-settlements (e.g. shares, and stock options), or cash-settlements (e.g. phantom stock).

Equity settlements involve granting equity instruments to the employee, and do not involve cash

payments, whereas cash settlements involve the payment in cash. The amount of cash-settlements is

based on the price or value of equity instruments. For example, when granting an employee phantom

stock, he becomes entitled to an amount of cash compensation equal to the performance of the share.

Note that in this form of compensation there are no shares granted to employees.

In the period before International Financial Reporting Standards (hereafter IFRS) has become mandatory

in the Netherlands, the Dutch Civil Code (2BW, Title 9) and guidelines provided by the Dutch Accounting

Standards Board1 (in Dutch: Raad voor de Jaarverslaggeving or RJ) had to be applied. These guidelines

provide guidance for the recognition of stock options, but were lacking guidance for other forms of

share-based payment in financial statements. In the same period the International Accounting

Standards, provided even less guidance on share-based payment. Dutch GAAP required some specific

disclosures and the application of the intrinsic value method for stock options in the financial

statements, whereas IAS did not have any guidelines for stock options, except for disclosure guidelines.

The International Accounting Standards Board (hereafter IASB) published a new standard that deals with

share-based payment in February 2004. The new standard, effective in 2005, is IFRS 2: Share-based

payment, which replaced the limited guidance provided in IAS 19 about share-based payment

transactions. In 2005 listed companies in the Netherlands had to apply IFRS. The new standard required

companies to recognize the fair value of share-based payments in the profit and loss account (IASB,

2009, p. A59).

1 The Guidelines (Richtlijnen) of the Dutch Accounting Standards Board (Raad voor de Jaarverslaggeving) are not mandatory, although, because of the way these guidelines are established, they can be considered as authorative (KPMG, 2007, pp. 43-47).



The most visible change of the new accounting standard is for stock options, as for other share-based

compensation forms there were no guidelines prior to the adoption of IFRS in 2005. The change for

stock options includes the shift from the intrinsic value method to the fair value method. The intrinsic

value method implies that the positive difference between the market price of a share at grant date and

the exercise price of that option is recognized in the profit and loss account. In case the exercise price is

higher or equal to the share price, there was no journal entry. Accordingly, there were no costs

recognized in the profit and loss account. The fair value method requires that the fair value of the stock

option is recognized in the profit and loss account. The fair value of an option can be calculated by

different methods, of which the binomial tree and the Black-Scholes formula are most common. The

intrinsic value method is perceived as the most favorable one to firms, because the intrinsic value of

stock option can be easily set to null, when the exercise price of a stock option equals or is higher than

the market price of a share. Accordingly, the recognized cost of stock options according to the intrinsic

value method is null. As the costs of granting stock options were null, it is considered as an additional

benefit of stock options as remuneration. According to the fair value method, the value of stock options

is always positive. Under the fair value method, companies have to recognize a certain amount of costs

for stock options in the profit and loss account. According to Hall and Murphy (2003, pp. 65-66), the fair

value of a stock option is the economic cost. A company bears an economic cost of granting an

employee with a stock option instead of selling it to market participants. When applying the intrinsic

value method the economic cost of a stock option remains the same. However, the perceived cost is

equal to the difference between market price and exercise price (i.e. intrinsic value). The fair value

method aligns the economic costs with the perceived costs of stock options. Consequently, the adoption

of the fair value method removes the additional benefit of stock options to be ‘free’ remuneration, as all

forms of compensation are treated equally. This may provide an incentive to firms to decrease the

amount of stock option compensation, as Carter et al. (2007, p. 354) argue, the adoption of the intrinsic

value method has led to an overweighting of stock options in the United States, due to the created

benefit of stock options under the intrinsic value method. In addition, Hall and Murphy (2003, p. 60)

suggest that restricted stock as remuneration is more efficient relative to stock options. Although stock

options were not the most effective way to compensate directors, the benefit of being a ‘free’

compensation form seems to have been decisive.

The United States has undergone a similar change of accounting standards in the same period as IFRS

did in the European Union. Also in the U.S. the fair value method has to be applied since 2005. Whereas

the intrinsic value method or the fair value method could be applied in the period before 2005. Almost



all companies chose to adopt the intrinsic value method (Feng and Tian, 2007, p. 6). The adoption of the

fair value method leads to a declining trend of granting stock options in the United States (Feng and

Tian, 2007; Carter et al., 2007; Brown and Lee, 2007; Choudhary, 2008). Kraakman (2010) has been

investigating the effect of IFRS 2 on the amount of stock option compensation for both CEOs and all

employees of 41 listed companies in the Netherlands. She concluded that the introduction of IFRS 2 has

had a negative effect on the fair value of stock option compensation for both groups.

Feng and Tian (2007) concluded that the decrease of stock option compensation in the United States

was mainly caused by the adoption of the fair value method, while the introduction of the Sarbanes-

Oxley Act, the 2000’s stock market crash and the option backdating scandal contributed to the decline.

For the Netherlands, the introduction of the Dutch Corporate Governance Code in 2004 and Article 383c

in 2002 has led to a greater exposure of corporate remuneration practices to the public. These factors

may, as well, contribute to the decline of stock options, and will, therefore, also be discussed in this

thesis.

1.1 Research question

The studies of Brown and Lee (2007), Carter et al. (2007), and Choudhary (2008) show that whilst stock

option compensation declined, due to the adoption of the fair value method, another form of share-

based payment, namely restricted stock compensation, increased in the United States. As discussed

previously, Hall and Murphy (2003, p. 60) say that restricted stock is a more efficient means of

remuneration. Whilst it is also shown that stock option compensation is a popular form, because of the

intrinsic value method. As IFRS 2 treats all compensation forms in the same way with the fair value

method, the benefit for stock options with the intrinsic value method is removed. Resulting in stock

options to be less attractive as remuneration, and other compensation forms to become relatively more

attractive. In this way, stock option compensation might be declined and other forms of compensation

might have experienced an increase, due to their increased attractiveness.

The mandatory adoption of the fair value method in the United States has led to a change in

compensation. According to Brown and Lee (2007), Carter et al. (2007), and Choudhary (2008) this event

is considered to be an economic consequence of the mandatory adoption of the fair value method in the

United States. However, in the U.S. the fair value method has not affected other forms of share-based

payment. In this thesis I will investigate whether the introduction of IFRS 2 has led to a change in

compensation contracts for companies listed at the Dutch stock exchange (hereafter: Dutch-listed



companies). In particular, if IFRS 2 caused a substitution from stock option compensation to other forms

of compensation. This leads to the research question of this thesis:

Has IFRS 2 caused a substitution from stock option compensation to other forms of compensation for

Dutch-listed companies?

As discussed before, the mandatory adoption of the fair value method is proved to have its impact on

stock option compensation and restricted stock compensation in the United States, as Brown and Lee

(2007), Carter et al. (2007), and Choudhary (2008) have found. All other forms of compensation were

not affected by the new standard. In this thesis other forms of compensation are taken into account,

since the introduction of IFRS 2 may have led to a change in other compensation forms than only

restricted stock and stock option compensation. Salary, bonuses, and share-based compensation are

examples of other compensation forms. This thesis focuses only on the remuneration of the board of

directors (in Dutch: Raad van Bestuur).

1.2 Research method

The effect of a new accounting standard on the change in compensation decisions for directors is a topic

in the scope of economic consequences. As Zeff (1978, p. 56) defines: “the impact of accounting reports

on the decision-making behavior of business, government, unions, investors and creditors”. A new

standard has its impact on the accounting numbers. When accounting numbers are altered, the

decision-making process is changed. Accordingly, the introduction of IFRS 2 leads to changing accounting

numbers, which, in turn, involves a change in remuneration practices. Guay et al. (2003, p. 405) suggest

that the adoption of the fair value method might lead to worse financial results and raise the firm’s cost

of capital. To conduct a proper research, this thesis will discuss prior literature regarding this subject,

which will lead to the development of hypotheses and a research model. This thesis empirically

investigates the economic consequences of IFRS 2 regarding the possible change in compensation.

According to Beattie et al. (2006, pp. 80-82), researchers are using four methods to identify and measure

economic consequences, namely archival accounting data analysis, market-based research,

experimental studies, and surveys. The archival data analysis compares accounting data in the period

before the change in accounting standards, and the period after that date. It can also construct pro-

forma accounting numbers to see what the impact of a proposed standard is. Market-based research

investigates the impact of a new accounting standard on the stock price. Experiments explore how users

process a new accounting standard, and how it influences them. Surveys are more focused on the

perception of users of financial statements. It investigates the attitudes of users towards a changing



accounting standard, and how this leads to changes in behavior. For this research, the archival data

analysis fits best, as accounting data before the introduction of IFRS 2 will be compared with accounting

data after.

1.3 Relevance

In this thesis, the possible economic consequence of IFRS 2 is dealt with. In my view, the effect that an

accounting standard can have on the decision-making behavior of a company is a fascinating

phenomenon. The current available literature about IFRS 2 in the Netherlands is very limited. It

documents only that stock option compensation has declined due to the introduction of IFRS 2, but does

not discuss the change of other forms of compensation. This thesis goes a step further by incorporating

all other forms of compensation, and see how stock option compensation is substituted for by other

forms of compensation. This thesis contributes to the already available literature by researching this

substitution caused by IFRS 2 in the Netherlands.

Additionally, remuneration of the board of directors is a hotly debated topic. After the financial crisis,

people have started to ask why the board of directors still received bonus payments during that time.

Especially, the remuneration in the banking sector in the Netherlands has been much criticized. This

thesis will provide an insight in how a new accounting standard can affect the amounts of different

forms of compensation, and whether this can be used to give direction to societal accepted amounts of

remuneration.

1.4 Stucture

This thesis is structured to ground statistical findings with theory and empirical literature in a way to

come to empirical conclusions about the change in remuneration practices of companies listed at the

Dutch stock exchange. Chapters 2 and 3 provide a theoretical framework on different compensation

forms and the institutional setting, respectively. Specifically chapter 3 deals with possible factors that

could explain remuneration behavior. In chapter 4, several empirical studies regarding the impact on

accounting numbers and economic consequences in the United States and the Netherlands, as well as

determinants for compensation are reviewed. Following from the findings, a research design is

constructed, which is discussed in chapter 5. Chapter 6 shows the statistical results together with an

analysis on the formulated hypotheses. In chapter 7, the theory, empirical literature, and the findings in

chapter 6 are combined to an overall conclusion. At last, chapter 8 describes the limitations of the

research conducted in this thesis and several suggestions for future research are made.



Chapter 2: Compensation forms

The total remuneration package for the board of directors consists not only of share-based payments,

but also of a fixed salary, bonus payments, pensions, and secondary conditions like a car and health

insurance. This chapter gives a more detailed description what forms of compensation this thesis takes

into account in investigating whether there is a substitution effect due to IFRS 2. At first, fixed salary and

bonus payments are discussed. After that, this section elaborates on forms of share-based payment. At

last, this chapter explains the reasons behind granting employees share-based payment.

2.1 Fixed salary

A fixed salary (or base salary) includes a periodically payment of cash, independent of the work done.

For risk-averse and low-level employees this form of compensation works well. However, a fixed salary

might create a moral hazard problem in the company. Employees might work inefficient, while they are

ensured to receive their paycheck. This is illustrated by Hall and Murphy (2003, p. 63), who found that

cash compensation for CEOs is not correlated with the performance on the stock market, whereas total

CEO compensation is strongly correlated with the performance on stock markets. This implies that cash

compensation does not encourage employees to work in the interests of shareholders.

2.2 Bonus payments

Bonus payments can be compared to share-based payment to the extent that bonus payments are

dependent on the performance of an employee. Employees will receive bonuses when they meet

certain targets or as a proportion of their output (e.g. commission). The targets to be achieved in order

to become entitled to bonus payments can be both individually or companywide. A salesperson that has

sold a certain amount of products will receive a proportional amount of his sales in cash is an example of

an individual target. A companywide target may be, when the company’s earnings are above a

predetermined level an employee becomes entitled to a fixed amount of cash.

The reason for linking cash rewards to the performance of an employee or company can be explained

with the agency theory, which will be discussed in section 2.4.

2.3 Share-based payment

The idea behind granting employees with share-based payment is to align the interests of principals and

managers. In the classical principal-agent problem the interests of the principal are different than those



of the agent. The principals (i.e. shareholders) want a high return on their shares, whereas agents (i.e.

management) want high salaries. To align the interests of principals and agents, management is often

paid with share-based payments next to a cash salary. IFRS 2 (IASB 2009, p. A77) defines share-based

payment arrangement as:

“An agreement between the entity (or another group entity or any shareholder of any group entity) and

another party (including an employee) that entitles the other party to receive (a) cash or other assets of

the entity for amounts that are based on the price (or value) of equity instruments (including shares or

share options) of the entity or another group entity, or (b) equity instruments (including shares or share

options) of the entity or another group entity, provided the specified vesting conditions, are met”.

Usually the number of granted shares depends on the performance of a company. IFRS 2 distinguishes

between equity-settled share-based payment, cash-settled share-based payment, and another form

where the receiver has the choice to settle the payment in either cash-settled or equity-settled. First,

these forms will be discussed more specifically. The second section shows the explaining theories of

share-based payment.

2.3.1 Equity-settled share-based payment

A company’s equity is the difference between the total assets and the total liabilities. Equity instruments

(as mentioned in the definition of share-based payment arrangement) provide entitlement to a

company’s equity. The main instrument of equity is a share. IFRS 2 (IASB 2009, p. A75) defines an equity-

settled share-based payment transaction as: “A share-based payment transaction in which the entity (a)

receives goods or services as consideration for its own equity instruments (including shares or share

options), or (b) receives goods or services but has no obligation to settle the transaction with the

supplier”. Thus, a company receives goods or services, for example labor from an employee, and pays

for it by giving its own equity instruments.

2.3.2 Cash-settled share-based payment

Another form of share-based payment is cash-settled. Cash-settled share-based payment implies the

obligation of a company to pay in cash for the goods or services that they have received. As IFRS 2 (IASB

2009, p. A75) defines: “A share-based payment transaction in which the entity acquires goods or

services by incurring a liability to transfer cash or other assets to the supplier of those goods or services

for amounts that are based on the price (or value) of equity instruments (including shares or share

options) of the entity or another group entity”. The amount of the obligation of the company to pay



cash depends on the price of equity instruments. For example, when an employee has the right to cash-

settled share-based payments and the share price of the company’s shares increased, the employee

entitles to a proportional amount of cash. This form of compensation is also called stock appreciation

rights.

2.3.3 Choice between cash-settled and equity-settled

As discussed previously, IFRS 2 distinguishes between three forms of share-based payment. The first two

have already been discussed. The third one involves the choice to either cash-settled or equity-settled

share-based payment. Both parties can have the right to choose how an obligation has to be paid. When

the counterparty (e.g. the employee) has the right to choose the obligation consists of a debt

component and an equity component according to IFRS 2. When the company has the choice how to

settle an obligation, there are no components assigned.

2.3.4 Share-based payment in the Netherlands

The different forms of share-based payment are specific for IFRS 2. Before the mandatory adoption of

IFRS for listed countries in the Netherlands in 2005, the Dutch Accounting Standards Board did not have

specific guidelines how to account for share-based payment (Ernst & Young, 2004, p. 193). Accordingly,

a distinction between forms of share-based payment was also not present. The RJ-guidelines did only

provide guidance regarding employee stock options. In IFRS 2 stock options are included in equity-

settled share-based payments, as stock options are equity instruments. However, it seems that the DASB

was not unaware of share-based payment, as the guidelines did include stock options, but the lack of

guidance for all other forms of share-based payment suggests that there was a grey area.

2.4 Explaining share-based payment

In the agency theory, principals (i.e. shareholders) want high earnings, which imply a higher return on

their stock, and agents (i.e. managers or other employees) want, for example, high salaries, which imply

more costs, and lower earnings. Agents have fewer incentives to maximize shareholder value, as they

are considered to act out of self-interest. Agents are assumed to be risk-averse and principals risk-

neutral (Feng and Tian, 2007, p. 8). This difference in risk tolerances, together with working horizons,

and job perks, creates a decline in firm value as agents act out of self-interest, this decline in costs are

agency costs (Zimmerman, 2009, p. 141). As shareholders want a firm value as high as possible, the

agency costs should be at a minimum. Agency costs are reduced when the interests of agents and

principals are aligned. A popular method to do this is granting employees with incentive compensation.

Next to a fixed salary, employees can receive share-based payment, as a reward for meeting



performance goals. Setting performance goals will increase firm value or the share price. When

employees strive to meet performance goals the interests of principals and agents are aligned. As in the

Dutch Corporate Governance Code (Corporate Governance Committee, 2003, p. 10) is stated that the

compensation granted to the board of management shall encourage management not to act in self-

interest, and will increase management’s vision in the medium and long term.

Another explanation that firms engage in granting employee share-based payments is that a company

suffers from cash constraints. Note that this explanation only holds for equity-settled share-based

payments, as in cash-settled share-based payments cash payments are still involved. Companies can

attract employees without spending cash. Core and Guay (2001, p. 275), and Yermack (1995, pp. 24-25)

showed that companies with financial constraints are using relatively more stock options.

Equity-settled share-based payment can also help companies to employee attraction and retention. Hall

and Murphy (2003, p. 56) and Oyer and Schaefer (2002, pp. 23-27) argue that companies can attract the

employees by granting stock option compensation, while decreasing other forms of compensation. They

also say that paying with stock options will also affect the kind of employees that a company can attract.

Stock option compensation makes a company more attractive for persons thinking they could influence

the share price of a company, and thereby receive a higher salary (Arya and Mittendorf, 2005, pp. 201-

202). According to Hall and Murphy (2003, p. 57) this is mostly applicable for high-level managers and

key employees, but not for low-level managers or rank and file employees. The same authors suggest

that, in particular, stock options provide incentives for retention of employees. Most of the time, equity-

settled share-based payment involves a vesting period. When certain vesting conditions are met during

this period, the receiver of equity-settled share-based payment gets an unconditional right to the equity

instrument. In the case of stock options, the vesting period is the period from the grant date to the date

where the option can be exercised (Leung and Sircar, 2009, pp. 99-100). When the employee is fired or

leaves the company within this period he or she loses the right to a particular equity instrument. An

employee will continue working for the company, as he or she wants to earn the right to the share-

based payment. Obviously, retention incentives are higher when the share price of an equity instrument

is higher. As Hall and Murphy (2003, p. 57) state that in the case of stock options the retention

incentives are high, when the difference between the share price and the exercise price is high. The

same applies for shares as share-based payment. When the share price (or fair value) of a share is high,

the retention incentives are high.



2.5 Conclusion

The previously discussed forms of compensation also indicate the scope of this thesis. In this thesis,

fixed salaries, bonuses, and share-based payments are the forms of compensation within the scope of

this thesis. Fixed salary introduces a moral hazard problem, because employees are ensured to be paid.

Bonus payments and share-based payments do both provide incentives to employees to work efficient

and in the interest of shareholders (agency theory). Additionally, the amount of share-based payment is

dependent on the share price performance and can be either settled in equity instruments or cash.

Granting equity instruments to employees usually results in additional benefits for the company. Equity

instruments do not involve an outflow of cash, and it helps companies to attract and retain employees.

Pensions are another form of compensation, but it is beyond the scope of this thesis. Since pensions are

accounted for according to a different standard (IAS 19). Any changes in this standard may cause an

interaction effect with the change in remuneration. Second, the annual pension costs for an employee’s

pension is dependent on his salary. Therefore, if remuneration is declining, it is probable that the annual

pension costs are also declining. Additionally, the government has imposed by laws that companies have

to contribute to an employee’s pension within a specified range dependent on the type of pension,

according to Article 18a-18i of the Dutch law on income tax (in Dutch: Wet op de loonbelasting 1964,

artikel 18a-18i). Companies are, therefore, not entirely free to decide how much to contribute to an

employee’s pension, and it does not classify as a form of compensation as discussed in this thesis.



Chapter 3: Institutional setting

The introduction of IFRS 2 involved that Dutch listed companies had to treat remuneration differently.

Before IFRS Dutch listed companies had to apply Dutch GAAP. Guidelines on financial reporting (RJ-

guidelines) were issued by the Dutch Accounting Standards Board. Although companies were not legally

required to follow specifically these guidelines, the RJ-guidelines are generally accepted in the

Netherlands. In the scope of guidelines for share-based payments, Dutch GAAP provides less strict

guidelines. The Dutch guidelines for share-based payments before 2005 are discussed in the first

section. Although Dutch GAAP does not distinguish between cash-settled and equity-settled share-based

payment, it is done in this section to make a comparison between Dutch GAAP and IFRS 2. In the second

section the guidelines in IFRS 2 are explained. The Dutch Corporate Governance Code and Article 383 in

Book 2, Title 9 of the Dutch Civil Code are discussed in respectively section three and four to give an

insight what is legally required regarding share-based payment transactions in the Netherlands. The fifth

section deals with the situation in the U.S. with respect to the accounting change for share-based

payments, because this thesis is based on literature about the situation in the United States. The sixth

section will end this chapter with a conclusion.

3.1 DASB guidelines before 2005

Dutch GAAP was lacking specific guidelines on share-based payment transactions, except for stock

option compensation. For other forms of compensation the guidelines might be obvious. For salary and

bonus payments the costs are expensed to the applicable period. So the salary and bonus over the year

2002 is recognized on the profit and loss account in 2002.


For equity-settled share-based payment, other than stock options, guidelines only required that the

receipts of cash or in kind, in order to exchange it with shares, should debit reserves (Ernst & Young

2004, p. 193). Providing labor to the company can be seen as receipts in kind. When a company granted

100 shares with a face value of € 10 to an employee to reward him for his labor, the journal entry would

be:

Reserves 1,000

To equity 1,000



Note that Dutch GAAP does not distinct equity-settled and cash-settled, as there are no specific

guidelines. The journal entry above involves a change in the composition of shareholders’ equity, and

has no effect on the distribution of liabilities and equity on the balance sheet. Also note that this form of

share-based compensation does not require recognizing costs in the profit and loss account, whereas a

fixed salary does.

In the case of employee stock options the DASB did provide specific guidelines. Under Dutch GAAP,

companies had to apply the intrinsic value method when accounting for stock options. Under this

method the compensation cost of the stock option is expensed in the profit & loss account. The

compensation cost is the difference between the market price of the stock on the day that the option is

granted and the exercise price of the option. This amount is in most of the cases zero (Hull and White,

2004). The compensation cost is zero when the exercise price equals or is higher than the share price. It

is favorable for the company to have no compensation costs, since in that case there are no costs

recognized in the profit and loss account, implying a higher profit. For example, an option has an

exercise price of € 15, and the market price is € 20, the recognized compensation cost is € 5. The journal

entry would be:

Employee compensation costs 5

To additional paid-in capital 5

When the market price is € 10, the difference is negative (i.e. -€ 5). The compensation cost, however,

cannot be negative, and is recognized as zero. The exercise price of stock options is determined by the

issuer, in this case the company. Companies will set an exercise price equal to or higher than the market

value, implying a compensation cost of zero, and no costs in the profit and loss account, and thus stock

option compensation is ‘free’ for companies. In addition, the exercise price is set equal or higher than

the share price to trigger employees to work on higher share prices. When a share price becomes higher

than the exercise price, it is profitable to exercise the option. Because of both reasons granting

employee with stock options is an attractive way to compensate employees.

To cover the obligation a company gets, while granting employees with stock options, companies usually

repurchase shares. The repurchase price is paid by bank or cash, and the additional paid-in capital

reserve diminishes with the same amount. When an employee exercises its share option with an

exercise price of € 15 and a face value of € 10, the journal entry would be:



Cash 15

To equity 10

To additional paid-in capital 5

3.1.2 Cash-settled share-based payments

Cash-settled share-based payments do not involve payments in shares, but in cash. The amount is

dependent on the performance of the share on the stock market in that year, which makes this type of

compensation share-based. The amount of cash-settled share-based payments is known when the year

has ended. At the closing date of the financial statements, usually December, 31, the amount of cash-

settled share-based payments is based on best estimation. Accordingly, the estimated amount of cash-

settlements is recognized as a provision on the balance sheet and as costs on the profit and loss

account. For example, when a company has to pay a manager € 1,000 as a cash-settled share-based

payment. On December, 31 the journal entry would be:

Employee compensation costs 1,000

To provision 1,000

On the date when the employee receives the cash, the journal entry would be:

Provision 1,000

To bank 1,000

Dutch GAAP does not require specific disclosures on share-based payments, only for stock options.

These requirements involve the disclosures of the amounts of options not yet exercised at the beginning

of the year, granted options and their exercise price, exercising period, and the accompanying shares,

exercised options during the year, and options not yet exercised at the end of the year.

3.2 IFRS 2 guidelines

The mandatory adoption of IFRS 2 for Dutch-listed companies in 2005, accompanied not only the change

that all forms of compensation discussed here had to be recognized on the profit and loss account, but

also the intrinsic value method for stock options was replaced by the fair value method (Bosman et al.,

2006, p. 24). IFRS 2 has been developed in a joint project of the IASB and the FASB. The American

equivalent of IFRS 2 is SFAS 123 (R), which became mandatory in the U.S. in 2005.

At first, IFRS 2 distinguishes share-based payment into three categories: equity-settled, cash-settled, and

a form in which one of both parties can choose between equity-settled and cash-settled. However the



categories are accounted for differently, they should all represent the fair value of the goods or services

an entity has received.

When a company cannot reliably estimate the fair value of the goods or services received, they should

measure the fair value of the equity instruments granted. In the case of granting equity instruments to

an employee as remuneration, the company should measure the fair value of the equity instruments,

since it is assumed that the services rendered cannot be estimated at fair value (Alfredson et al., 2009,

p. 199). The fair value of equity instruments is based on the market prices of those instruments.


The fair value of shares is measured as the market price of the entity’s shares at grant date, while taken

into account specific conditions for granted shares, whereas the vesting conditions should not be taken

into account. IFRS 2 (IASB, 2009, p. A77) defines vest as: “To become an entitlement…equity instruments

of the entity vests when the counterparty’s entitlement is no longer conditional on the satisfaction of

any vesting conditions.” The period between the grant date and the date when vesting conditions are

satisfied is the vesting period. The fair value is, however, expensed equally over that vesting period.

Assume an employee receives 100 shares. The market price at grant date and fair value is € 15. The

vesting period is three years. The employee is granted with € 1,500 stock compensation, but earns the

unconditional right to the shares in three years. Therefore the yearly expense of the granted shares is €

500. According to Alfredson et al. (2009, p. 199), the journal entry would be:


To equity 500

Determining the fair value of shares is straightforward. The fair value of stock options, however, cannot

be determined that easily. An option gives the choice whether to exercise it or not, thus make profit or

lose nothing. Accordingly, an option provides the holder with decreased risk. This decreased risk has a

value, which is the fair value of the stock option. The fair value is equal to the market price of stock

options. However, the market price is not available in most of the times. In that case option pricing

models are used to estimate the fair value (IASB, 2009, pp. A78-A79). The two most common option

pricing models are the Black-Scholes formula, and the binomial tree (Muurling and Lehnert, 2004, p.

392). The latter uses possible values of stock options to calculate the underlying value of a stock option.

According to Berk and DeMarzo (2007, pp. 686-694) the basic model consists of only one period,

whereas the multiperiod model incorporates more than one period. In the binomial tree model a share



can only have two possible future values. Either the share price rises with, for example, € 20 or it falls by

€ 20. By an increased share price of € 20 the stock option will be exercised and has a return of € 20. A

stock option will not be exercised when the share price drops below the exercise price and its

accompanying value is null. The values and share prices, together with the risk-free interest rate and the

number of purchased shares, will be included in a formula to calculate the underlying value of a stock

option. By including multiple periods the model and decreasing the lengths of periods the binomial tree

model provides a realistic model for pricing of stock options.

The Black-Scholes formula can be derived from the binomial tree model (Berk and DeMarzo, 2007, pp.

694-702). The length of each period of the binomial tree model approaches to null in the Black-Scholes

model. In the Black-Scholes model, however, the expected return of stock options is replaced by the

volatility of a company’s stock. The value of a stock option is calculated by:

C(S) = Sx N(d1) – PV (K) N(d2)

Where d1 and d2 are calculated as:

d1 = ln [S x /PV (K )]

(σ √T )+

(σ √T )2

and d2 = d1 - σ √T

Where, Sx is the value of the share divided by the compounded dividend yield until the expiration date 2,

N(d) is the cumulative normal distribution with d as boundary, PV (K) is the present value of the exercise

price, σ is the annual volatility of shares, T is the number of years to expiration date, and S is the actual

share price (see also Appendix I).

According to IFRS 2 all option pricing models should minimally include the exercise price, lifetime,

current price of underlying shares, expected volatility of the share price, expected dividends on shares,

and the risk-free interest rate. The Black-Scholes model, as discussed before, does meet these

requirements. The present value of the exercise price is calculated as the exercise price divided by the

risk-free interest rate.

IFRS 2 requires companies to recognize the fair value of the granted stock options to be expensed on the

profit and loss account with equal amounts over the (expected) vesting period. Assume that an

2 According to Berk and DeMarzo (2007, p. 700) this calculation is applicable when the company pays out dividend proportional to the share price. Otherwise, the stock’s market price should be divided by the present value of any dividends paid before the expiration date. Due to the availability of the dividend yield and its usefulness (Berk and DeMarzo 2007, p. 700) it is assumed that dividends are proportional to the share price, see also section 5.2.



employee has been granted with 100 stock options with a fair value of € 5. The (expected) vesting

period is five years. The total fair value of granted stock options is € 5 * 100 = € 500. The stock options

are conditionally awarded. Therefore, the total fair value is recognized equally over the vesting period.

The employee compensation costs for one year is € 500 / 5 years = € 100. The share price is equal to the

exercise price of € 15. According to Alfredson et al. (2009, p. 199), the journal entry would be:


To equity 100

Note that share capital is not affected by granting stock options, since it is unknown whether stock

options will be exercised. When options have not been exercised during their lifetime IFRS 2 does not

require a correction.

3.2.2 Cash-settled share-based payment

Also cash-settled share-based compensation should be measured at fair value. Although cash-settled

compensation is paid in cash, the fair value is dependent on the fair value of equity instruments. Stock

appreciation rights entitle employees to earn an amount of money depending on the difference

between share price and a predetermined price level in a specified period. The fair value of cash-settled

compensation is measured by the services an entity has received from its employees. The fair value is

recognized in a liability to pay for them, and will be adjusted for during the vesting period (IASB, 2009, p.

A66). The adjustments of the liability are expensed in the profit and loss account (Ernst & Young, 2004,

p. 197). Assume a cash-settled share-based payment transaction with a fair value of € 1,000 and a

vesting period of two years. The amount of cash is dependent on the share performance in those two

years. According to the facts given in the reporting period, the liability for a company to reward an

employee for its services provided, in 2 years is € 1,000. According to Alfredson et al. (2009, p. 199), the

journal entry would be:

Employee compensation costs 1,000

To liability 1,000

The liability might be called, for example, cash-settled share-based payment transactions payable.

Assume that after one year the share price has dropped and the fair value of the liability has decreased

to € 800. An adjustment of the recognized liability should be made to represent the actual liability on

the balance sheet. The liability is set to 800 using the following journal entry:



Liability 200

To employee compensation costs 200

Note that for an increased liability the journal entry above is the other way around.

3.2.3 Choice between cash-settled or equity-settled

Share-based payment transactions in which one of both parties can choose between settlements

involves the problem that it is uncertain which accounting method, described above, should be

appropriate. IFRS 2 distinguish two situations. First, the counterparty (i.e. the employee) is granted the

right to choose between cash-settled and equity-settled. In this situation the entity has provided the

employee with a compound financial instrument, consisting of an equity component and a debt

component (for cash). To calculate the fair value of the compound financial instrument, the fair values

of both components have to be added. However, in the many times that both fair values are equal the

fair value of the equity component is considered as null, implying the fair value of the compound

financial instrument is equal to the fair value of the debt component. The fair value of the liability

should be remeasured every year.

Second, in the situation where the entity has the right to choose between settlements it will recognize

the liability as an equity-settled share-based payment transaction. When it is already known that an

entity will settle in cash, than the company should account for it as a cash-settled share-based payment

transaction.

3.3 Comparison

The accounting treatment of granted shares under the RJ-guidelines does not result in a different

amount of equity. The perceived costs of granted shares consisted solely from dilution costs. Under IFRS

2, equity rises and the fair value of granted shares is expensed in the profit and loss account, involving a

lower profit. For stock options, the intrinsic value method applied under the guidelines of the RJ

necessitates the intrinsic value of granted stock options to be expensed, whereas IFRS 2 required the

expensing of the fair value. As Robinson and Burton (2004) argue, the adoption of the fair value method

reduces net income, and is, therefore, considered as more unfavorable than the intrinsic value method.

The adoption of the fair value method for shares is also considered as more unfavorable, since it also

decreases net income. The fair value of both shares and stock options is equal to the economic costs,

whereas the perceived costs are dilution costs for shares and the expensed costs in the profit and loss

account for stock options (Hall and Murphy, 2003, pp. 65-67). For both compensation forms the



economic costs is higher than the perceived costs (Guay et al., 2003). The adoption of IFRS 2 aligns the

perceived costs with the economic costs. Recognizing the fair value of both equity-settled share-based

payments involves increasing (perceived) costs. Companies that are aware of this may alter

compensation contracts, as the costs of both compensation forms may not outweigh the benefits

anymore.

3.4 Dutch Corporate Governance Code

In 1996 a committee was formed to initiate self-regulation through transparency and monitoring, which

was called the Committee on Corporate Governance or the Peters Committee, named after the retired

CEO of Aegon, Jaap Peters, who was the chairman of this committee. The aim of the committee was to

investigate whether the balance between supervision, management and shareholders was still

appropriate, while the internationalization of Dutch-listed companies was increasing. In 1997, this

committee presented its final report with recommendations how to improve the governance within

listed companies. The most important aspect to implement these recommendations was to rely on self

regulation (De Jong et al., 2005, p. 474) to increase the transparency and responsibility of the corporate

policy, and to give shareholders more control (Commission Corporate Governance Code). Although the

recommendations by the committee of Peters can be regarded as the first corporate governance code in

the Netherlands, the results were disappointing (Akkermans et al., 2007, pp. 1107-1108). The low level

of compliance with the recommendations of the Committee, and the corporate scandals in the United

States resulted in a new appointed Committee on Corporate Governance, chaired by Morris Tabaksblat.

The most important change in respect to the former corporate governance code was that compliance

with the new corporate governance code is legally required since 2004. The Dutch legislator requires

that Dutch companies refer to the Code in their annual reports, and should disclose information to what

extent they comply with the code. If they do not comply, the company should explain (Corporate

Governance Committee, 2003, pp. 4-5). The principles of the Code are based on the two-tier system

with a separate management board and supervisory board.

Section II.2 deals with remuneration of both boards. According to the Code (Corporate Governance

Committee, 2003), if the remuneration includes a variable part, it should consist of short term and long

term incentives. This variable part aims to increase “the board members’ commitment to the company”

and the company’s objectives. Accordingly, the remuneration is structured so that the level of

remuneration is dependent on relevant developments to the company (e.g. share price performance,

and earnings), and does discourage management to act in self-interest. When a manager has been



granted shares as variable remuneration, he should retain them for at least five years, or in case of a

shorter employment period, the length of that period. (Corporate Governance Code Monitoring

Committee, 2009, p. 11). This is the vesting period. The Corporate Governance Code sets some more

principles related to stock options compared to shares. Best practice provisions require that stock

options are conditionally granted, except for management that have met predetermined performance

goals after three years of the grant date (vesting period). The exercise price of the stock options should

at least be the verifiable price of a company’s shares or the verifiable average price of predetermined

days within five trading days before and on the grant date (Corporate Governance Committee, 2003, pp.

10-11).

The Dutch Corporate Governance Code requires a two-tier board structure, in which the supervisory

board (in Dutch: Raad van Commissarissen) appoints, monitors, suspends, and dismisses the members

of the management board (Swagerman and Terpstra, 2009, p. 62). The remuneration of the

management board is determined by the remuneration committee, which consists of members of the

supervisory board, and is documented in the remuneration report. The amount of fixed salary, structure

and amount of the variable part of remuneration in a contract of a member of the management board

should be made public. Also, the value of the granted options to the management board shall be stated

in the notes of the annual report, including how this value has been determined (Corporate Governance

Committee, 2003, pp. 12-13).

3.5 Article 383 in Book 2, Title 9 of the Dutch Civil Code

In accordance with RJ-guideline 271, the Dutch Civil Code requires listed companies to disclose

information on the remuneration for the former and current members of the board of management.

Article 383c in Book 2, Title 9 of the Dutch Civil Code requests that total remuneration is divided in

periodical payments, pensions, severance payments, and bonus payments. Article 383d provides the

same guidance on disclosed information on stock options as RJ-guideline 271 does. This article was

enforced in September 2002. Since annual reports of 2002 are created in the year after, this act enables

to gather information on the remuneration of the members of the management board as of 2002.

3.6 Situation in the U.S.

In the period of 1995-2005 companies in the United States were able to choose a method to account for

stock options in their annual accounts. Either the intrinsic value method or the fair value method could

be used. The U.S. standard setter, the FASB, had tried to abandon the intrinsic value method in 1993,

but great opposition of companies made that the FASB had chosen for a voluntary adoption of the fair



value method. This standard (SFAS 123) was issued in 1995. Nearly all firms chose to use the intrinsic

value method until 2002 (Feng and Tian, 2007, pp. 5-6). The corporate scandals of Enron and WorldCom

resulted in a crisis of confidence in accounting. In order to resolve this crisis, a large number of U.S.

companies decided to voluntarily adopt the fair value method (Aboody et al., 2004, p. 128). Additionally,

the Sarbanes-Oxley act was installed, which provided guidance on corporate governance and made

company’s executives responsible for the fairness of annual statements. In March 2003 the FASB

announced that it would design a new standard on employee stock options. A few months later the

Congress introduced the Stock Option Accounting Reform Act. Under this act, companies are required to

only apply the fair value method for the top 5 of a firm’s highest paid executives. In 2004 the FASB

introduced an Exposure Draft on SFAS 123, requiring that companies apply the fair value method for all

stock option compensation, including the compensation granted to the top 5 executives and all other

employees. It would take to 2005 until the SEC implemented the new standard SFAS 123 (R) (Farber et

al., 2007, p. 6).

There were three main reasons why the FASB wanted to change the current standard SFAS 123. First,

the new accounting standards, IFRS 2 and SFAS 123 (R) are the result of the IASB and FASB Convergence

project. In this project standards of both standard setters converge, in order to increase the

comparability between US GAAP and IFRS. Due to this project IFRS 2 is quite similar to SFAS 123 (R).

Second, there were some serious concerns that stock options are the only form of employee

compensation that do not require expense recognition. Third, the variety of the accounting methods

used, in the period when companies could choose, led to non-comparable, complex disclosures, that

made financial reports less transparent (Farber et al., 2007, p. 4).

The guidelines in the Netherlands and in the United States were different before 2005. Before 2005 the

RJ-guidelines did not include specific guidelines on shares as a form of compensation, whereas US GAAP

required the fair value of shares granted to be expensed in the profit and loss account. The introduction

of SFAS 123 (R) had, therefore, no effect on the accounting method for restricted shares (Brown and

Lee, 2007, p. 5), as well as other forms of compensation. In addition, companies in the United States

have adopted a different board structure. Whereas, Dutch companies have a two-tier board structure,

US-based companies have an unitary board (Swagerman and Terpstra, 2009, p. 62). The situation in the

U.S. makes it ideal to investigate the effect of the shift from intrinsic value method to fair value method

on stock option compensation, and what forms of compensation are regarded as substitutes.



3.7 Conclusion

The Dutch accounting guidelines for share-based payment transactions before 2005 did not require

recognition of the fair value of granted equity instruments. The introduction of IFRS 2 has led to

changing accounting principles. The fair value of both granted shares and stock options should now be

expensed in the profit and loss account. The adoption of the fair value method under IFRS 2 is

considered to be more unfavorable for both stock options and share grants. For cash-settled share-

based payments the accounting principles have remained the same as before IFRS 2. The enforcement

of Article 383 in Book 2, Title 9 of the Dutch Civil Code in September 2002, and the legally requirement

to comply with the Dutch Corporate Governance Code, obliged listed companies to disclose information

on the remuneration of members of the management board. This enables that remuneration

information of the board of management is publicly available for annual reports created after that date,

in most cases the annual reports of the year 2002. The Dutch Corporate Governance Code also provided

guidance for the structure of the organization, as well as the remuneration policy. The remuneration

committee determines the remuneration of the board of management. The key factor within the Code is

that the variable part of remuneration will discourage management to act in self-interest, and should be

dependent on the firm’s performance. The situation in the U.S. was ideal to test whether the adoption

of the fair value method has had effect on stock option compensation, since the accounting methods for

other forms of compensation remained unchanged.



Chapter 4: Review of empirical literature

The introduction of IFRS 2 can have consequences for the amount of share-based remuneration for the

board of directors. This chapter reviews empirical literature regarding the change of accounting

methods and how companies’ remuneration behavior is influenced. The first section deals with the

impact of the change in accounting treatment on accounting numbers. Accordingly, executives alter

behavior to mitigate the influence of a new standard. As the U.S. went through a comparable change in

accounting standards regarding stock options, much literature is written about the economic

consequences of the mandatory adoption of the fair value method. Therefore, much literature discussed

in this chapter focuses on the change in stock option compensation. This will be discussed in the second

section. As the study of Feng and Tian (2007) is focused on a change in trend of stock option

compensation before and after 2002, this research is discussed first. The studies of Brown and Lee

(2007), Carter et al. (2007), and Choudhary (2008) deal with the change in the composition of

compensation, and whether the adoption of the fair value method is the main cause for this. Although

these studies are US-based, it provides an insight in how accounting principles affect the decision-

making behavior. The third section discusses two Dutch studies, namely Swagerman and Terpstra (2009)

and Kraakman (2010). Since the research models that are discussed in this chapter are not applicable to

the Dutch institutional setting and/or for the research of a substitution effect, and the Dutch study of

Swagerman and Terpstra (2009) is lacking a research model, a new research model has to be developed.

As a start, several determinants for the amount of remuneration of the board of directors are identified

in the last section. The discussed empirical literature is summarized in a table which can be found in

Appendix II.

4.1 Impacting accounting numbers

This section deals with the impact that IFRS 2 might have on the accounting numbers of companies. A

worse financial position and performance relative to the period before IFRS 2 provides executives with

incentives to change remuneration practices to minimize the impact of IFRS 2, and, thereby, reduce

stock option compensation.

4.1.1 Financial position and performanceSweeney (1994, pp. 301-302) found that there is a relation between accounting changes and

approaching of debt covenants. Approaching the debt covenants can be caused by increasing



recognition of expenses, like the recognition of stock option expenses. Violating debt covenants can

result in the obligation to an immediate pay back of the loan or higher cost of capital for a firm.

However, Dechow et al. (1996, pp. 15-16) found that there is no evidence to conclude that mandatory

expensing of stock options would lead to higher cost of capital for firms. Expensing stock options will

result in changing accounting numbers. Chalmers and Godfrey (2005) argue that due to the significant

change of accounting numbers, parties need to reconsider the covenants that are based on accounting

numbers. The adoption of the Australian equivalent of IFRS 2 will have a significant negative effect on

financial performance ratios. The deterioration of the financial performance ratios can cause lower

valuations of firms. The requirement of expensing options can also reduce efficiency, since

compensation contracts may be changed, implying less stock option compensation. This means that the

alignment of interests between shareholders and executives diminishes.

Viger et al. (2008) found that bank loan officers do treat recognized items and disclosed items

differently, when assessing a company’s risk. Loan officers in Canada were asked to judge different

cases. These cases included financial statements with stock option compensation disclosed in the notes

and comparable financial statements with recognition of stock option compensation costs. The loan

officers were asked to provide them with a credit assessment accompanying with a decision regarding

the granting of the loan, and a calculation of the interest rate. Their results support that footnote

disclosures are perceived differently than recognition of items. The cases with disclosures received more

favorable judgments compared to the cases with the recognition of stock option expenses. Basing on

these results, they conclude that loan officers did not take the disclosures into account when making a

credit assessment, and companies with stock option compensation disclosed in the notes are rated at

lower risk than similar companies with recognized stock option compensation.

4.1.2 Stock price reaction and value relevanceThe lower valuations of firms, caused by expensing stock options, can be the result of the different

treatment of recognized items and disclosed items. Since Article 383 required companies to disclose

granted compensation to executives, the introduction of IFRS 2 involved a shift from disclosure to

recognition of compensation costs. Robinson and Burton (2004, p. 101) found that investors think the

adoption of the fair value method is value relevant. This suggests that recognizing items is seen as more

value-relevant than disclosed items. However, Cotter and Zimmer (2003) argued that the value

relevance of recognized items is not different from disclosed items, but the perception of the reliability

of the information is a determinant. Also Frederickson et al. (2006, p. 1087) found that items disclosed



in the notes is perceived as less reliable than recognized items. Financial statement users invest more in

the firm that recognizes items than in the firm that discloses items.

Deshmukh et al. (2006, p. 103) show that the announcement to expense stock options do not have a

significant influence on the share price. It seems that the financial market has already taken into account

the information that is disclosed in the notes or that there is not a different perception of recognized

items and disclosed items. Dechow et al. (1996, p. 16) also found that investors did not act when the

mandatory expensing of stock options was announced. The stock market did not react, as if there were

negative economic consequences for high-growth firms. This is contradictory to the previous studies,

because in this study the perceived reliability of disclosures and recognized items are apparently not

different. This study suggests that there is not a different treatment of disclosures and recognized items

or that the market is efficient, according to the efficient market hypothesis.

4.1.3 ConclusionThe introduction of IFRS 2 is expected to have a negative influence on financial figures, shown by

Sweeney (1994), Dechow et al. (1996), and Chalmers and Godfrey (2005). Additionally, firms are found

to be more risky when the fair value of remuneration is recognized in the financial statements (Viger et

al., 2008). On the other hand, investors seem to have incorporated the fair value of compensation costs,

as the share price shows no reaction to the announcement to expense the fair value of stock options

(Dechow et al., 1996; Deshmukh et al., 2006). Nonetheless, the shift from disclosed compensation costs

to recognition in the profit and loss account is found to be value relevant (Cotter and Zimmer, 2003;

Robinson and Burton, 2004; Frederickson et al., 2006). The aforementioned results might indicate

incentives for companies to mitigate the impact of the adoption of the fair value method in IFRS 2.

Where firms might mitigate the deterioration of financial ratios and risk level increment, they might

alter remuneration practices by decreasing stock option compensation.

4.2 US-based studies

As discussed in the previous chapter the situation in the U.S. made it ideal to investigate the influence of

the mandatory adoption of the fair value method on stock option compensation, while accounting

methods for other forms of compensation remained unchanged. This section provides an overview on

how the change to fair value accounting for stock options affects the amount of stock option

compensation, and whether stock options are substituted for other forms of compensation. This section

deals with studies of Feng and Tian (2007), Brown and Lee (2007), Carter et al. (2007), and Choudhary

(2008) respectively.



4.2.1 Feng and Tian (2007)

Feng and Tian (2007) investigated the effect of mandatory option expensing on the composition of total

executive compensation from an agency theory perspective. They included an optimal contracting

model in their research, whereby the incentive component (e.g. stock option compensation and/or

restricted stock compensation) of an agent is dependent on an agent’s marginal productivity, firm

volatility, risk aversion and effort. This model implied that the mandatory expensing of options will lead

to a change in the optimal contract, and therefore the incentive component of an agent’s salary will

decrease. To test whether it was true what the model predicted they conducted an empirical research

on the trend of executive compensation. Feng and Tian took a sample of 1,609 firms, and 1993-2004 as

the sample period. The amount of equity incentives for executives is measured by the pay-performance

sensitivity developed by Jensen and Murphy (1990). The pay-performance sensitivity calculates the

change in a CEO’s compensation for an increase of shareholder wealth (i.e. firm value). However, stock

option expensing has become mandatory in the U.S. in 2005, the event date to see a change was 2002.

This is due to the Sarbanes-Oxley Act and the release of SFAS 148 (an amendment to SFAS 123) in 2002.

The FASB issued SFAS 148 in 2002 to provide guidance on how to transfer from disclosure to recognition

of the fair value of stock options. According to Feng and Tian (2007, p. 6), the introduction of SFAS 148

was a sign for many companies indicating that the mandatory expensing of options becomes reality in

the near future, and therefore start to adopt or prepare to adopt the fair value method voluntarily. In

their research they use two models: a quadratic model and a piecewise linear model. The latter requires

an event date, and the quadratic model estimates the event date of the change in trend itself. The

piecewise linear model is stated as:

Compit = αi + β1TL1t + β2TL2t + (control variables)it + eit ,

where TL1t and TL2t are time indexes, where TL1t is equal to t before the event year 2002 and zero after,

and TL2t is equal to zero before 2002 and t-t2002 after. The t equals values of 1,2,3,... and so on. The year

1993 is assigned with t = 1.

The quadratic model is specified as:

Compit = θi + γ1t + γ2t2 + (control variables)it + eit ,

where Compit is the incentive compensation, which can be either cash compensation, stock option or

restricted stock compensation in dollars, stock option or restricted stock compensation as a proportion

of total shares outstanding, the sum of the latter two and total compensation in dollars. The control



variables within both models are firm size, stock volatility, CEO tenure, growth opportunities, financial

leverage, liquidity constraints, past firm performance, corporate governance, deviations from the

optimal incentive level, and marginal taxes. The two models provide consistent evidence that from 1993

to 2001 the amount of executive compensation had a rising trend. In the same period the granting of

employee stock options had also a rising trend. From 2002 to 2004 granted stock options decreased.

Although stock compensation still increased, the total executive compensation has decreased. According

to the results of Feng and Tian this is completely driven by the decrease in stock options. They also

conclude that the decrease in stock options is the result of mandatory option expense (fair value

method), which make options less attractive as compensation. Also other events that occurred around

2002 contribute to the reduction of stock options. These events are the Sarbanes-Oxley Act, the option

backdating scandal and the 2000 stock market crash.

4.2.2 Brown and Lee (2007)

Also Brown and Lee (2007) found that the issuance of SFAS 123 (R) (the fair value method) caused a

decrease in ESO compensation for executives. They hypothesize that different firm specific

characteristics in the period before the mandatory expensing of stock options may have an effect on the

magnitude of the change in granting the top 5 executives with stock options. In their six hypotheses they

state that the likelihood of firms cutting back more on ESOs is dependent on firms with respectively

tighter debt covenants, greater tendency to achieve earnings benchmarks, weaker corporate

governance, higher levels of stock option compensation, higher grant-date fair values of outstanding and

unvested ESOs, and accelerated vesting of outstanding ESOs. They took a sample of 1,022 firms that

have granted the top 5 executives with stock options in 2001-2003, and 2005. Their OLS model is

specified as:

CHG_ESO% = β0 + β1 BINDING_COV + β2 MEET_POS + β3 MEET_INC + β4 Governance Variables + β5

IMPACT + β6 UNVESTED + β7 ACC_VEST + β8 TOP5% + β9 SIZE + β10 CUMRET + β11 CHG_SALES + β12

CHG_BM +β13 CHG_NOL + β14 CHG_SHORTFALL + β15 CHG_DIVCON + Σ Industry Dummies + ε.

The change in stock option compensation (i.e. CHG_ESO%) is a percentage of total compensation. The

stock option grants and total compensation are measured at fair value. This model controls for debt

constraints (BINDING_COV), earnings benchmarks (MEET_POS and MEET_INC)3, corporate governance

3 MEET_POS equals the percentage of years that the company achieved positive earnings levels benchmarks, when not recognizing the fair value of stock options, while recognition of the fair value of granted stock options would lead to negative earnings levels benchmarks in the period before 2005. MEET_INC is similar to MEET_POS, except that earnings levels benchmarks are replaced by earnings changes benchmarks.



(Governance Variables)4, the impact of ESO expensing on future earnings ( IMPACT), unvested ESOs

(UNVESTED), accelerated vesting (ACC_VEST), options granted to the top five executives relative to all

employees (TOP5%), firm size (SIZE), cumulative stock returns (CUMRET), different industries (Industry

Dummies), and changes in sales (CHG_SALES), book to market ratio (CHG_BM), marginal taxes

(CHG_NOL), cash flow (CHG_SHORTFALL), and dividend constraints (CHG_DIVCON). Thus, this model

controls for several economic factors. The industry dummies are multiple dummy variables. One of the

twenty dummies is set as one, when a company is classified within that industry, thereby controlling for

different industries. The empirical findings of this research provide support to accept their six

hypotheses about different firm specific characteristics.

Furthermore, Brown and Lee (2007) investigated whether the decrease of stock option compensation is

made up by alternative compensation for the top five executives. Their model specifies as:

Δ(Compensation Alternative) = δ0 + δ1Δ(ESO) + δ2 POST + δ3 Δ(ESO) × POST + δ4 ΣΔ Economic

Determinants + Σ Industry Dummies + ε.

The compensation alternative (Compensation Alternative) is either: salary, bonus, restricted stock, long-

term incentive payments, other annual compensation, or all other compensation. All compensation

forms are measured at fair value. POST is a dummy variable, which equals 1 if the observation is from

2005, and equals to zero if otherwise. And the economic determinants are changes in sales, book to

market ratio, and marginal taxes.

They suggest that ESOs and compensation alternatives are substitutes in the period before the

mandatory expensing of options. And that firms are more likely to substitute ESOs for restricted stock in

the period when ESO expensing became mandatory. To investigate this further they used another

regression:

ΔRESTRICTED = δ0 + δ1Δ(ESO) + (INITIATE, ESO%× INITIATE) + δ2 Σ Δ Economic Determinants + Σ Industry

Dummies + ε

INITIATE is a dummy variable, which is set to zero when companies granted restricted stock in 2001-

2003 and 2005, and set to one when companies did not grant restricted stock in 2001-2003, but did in

2005. All other variables are as specified in the previous regression models.

4 Brown and Lee (2007, pp. 13-15) have used the same 12 factors as Core et al. (1999) did. It is a mix of indicator variables and scale variables. All variables are ranked from most effective to least effective, where the most effective received the highest percentile. All percentiles are added up to obtain the summary variable RKGOV, represented by Governance Variables.



Their results suggest that after the introduction of SFAS 123 (R) the firms are more likely to grant

executives restricted stock, instead of stock options. However, the increase in restricted stock is less

than the decrease of stock options. Which implies that executive compensation has been reconstructed

and that total compensation has decreased.

The decline of total compensation can be explained by a theory of Hall and Murphy (2002). They argue

that since stock options are more risky than restricted stock, executives demand a risk premium. Stock

option compensation is risky, because there is a chance that the exercise price is higher than the share

price, implying that holders of options do not exercise them. To make up for the increased risk,

executives are paid a higher amount of stock option compensation relative to restricted stock. The

options cannot be hedged, nor traded by the recipients of stock option compensation, which makes the

risk premium even higher. They conclude that stock options are more expensive form of compensation

relative to restricted stock and cash.

4.2.3 Carter et al. (2007)

Carter et al. (2007) also focus on the composition of CEO equity compensation. First, they conducted a

research to investigate whether financial reporting concerns are associated with equity compensation

granted to CEOs. With a sample of 6,242 CEO-year observations in the period 1995-2001, they

conducted a multivariate regression. They took restricted stock compensation, stock option

compensation, and total compensation for CEOs. They use the regression:

DEP_VBLjt = α0 + α1FINRPT_1jt + α2FINRPT_2jt + α3DEV_INCjt + α4CASH_CONSTRjt + α5DIV_YLDjt +

6EARN_VOLjt + α7EQ_CONSTRjt + α8TENUREjt + α9LNASSETjt + α10BOOK_MKTjt + α11RETjt +

α12ln_pre_DEP_VBLjt + εjt

The dependent variable (DEP_VBLjt) is the natural logarithm of either:

The value of stock options granted to the CEO in a year;

The value of restricted stock granted to the CEO in a year;

The total compensation to the CEO in a year.



They controlled for the financial reporting concerns with participating in capital markets (e.g. leverage)

(FINRPT_1jt)5, and with plans to access capital markets (FINRPT_2jt)6. Also for the deviation from the

predicted incentive levels (DEV_INCjt), cash constraints (CASH_CONSTRjt), dividend yield (DIV_YLDjt),

earnings volatility (EARN_VOLjt), issuing equity constraints (EQ_CONSTRjt), CEO tenure (TENUREjt),

economic determinants of compensation like size (LNASSETjt), investment opportunities (BOOK_MKTjt),

and performance (RETjt), and for the granted compensation in the prior year (ln_pre_DEP_VBLjt). Their

results show that firms with more financial reporting concerns use less restricted stock, and use more

stock option compensation. Financial reporting concerns are defined as the concern about adverse

earnings impact by new financial reporting standards.

Second, they examined how the expensing of stock options would result in a changing composition of

executive compensation. Their sample included 206 firms that began to expense stock options in 2002

or 2003, and a control group of 1,483 firms that were not expensing stock options. Using a control group

will reduce the influence of economic factors. Their univariate analysis of the executive compensation of

both groups supports that firms that decide to expense stock options are shifting towards the use of

restricted stock. By using the following regression they control for economic trends and other factors

that can influence executive compensation:

DEP_VBLjt = α0 + α1EXPENSERjt + α2DEV_INCjt + α3CASH_CONSTRjt + α4DIV_YLDjt + α5EARN_VOLjt +

α6EQ_CONSTRjt + α7TENUREjt + α8LNASSETjt + α9BOOK_MKTjt + α10RETjt + α11ln_pre_DEP_VBLjt + εjt

Where the dependent variables are the same as in the previous regression. EXPENSER is a dummy

variable that is 0 when firms do not expense options in 2002 or 2003. The other independent variables

are also the same as in the previous regression. Their results suggest that firms that decide to expense

options increased the use of restricted stock significantly relative to the control group, without

increasing total executive compensation. According to Carter et al. (2007), the shift from stock options

to restricted stock is the result of eliminating the favorable accounting treatment of stock options. The

favorable accounting treatment has led to an overweighting of stock option compensation, and an

underweighting of restricted stock in executive compensation.

5 The variable FINRPT_1jt is composed of the proportion of quarters that the firm’s earnings per share were higher or equal to previous years (EPS_INCR), the proportion of quarters that the firm’s earnings per share were higher or equal to analysts’ forecasts (BEAT_FCST), and the leverage of the firm (LEVERAGE).6 The variable FINRPT_2jt is composed of the extent to which the firm is going to issue equity (ISSUE_EQ), and is going to issue debt (ISSUE_DEBT).



Due to the favorable accounting treatment of stock options, executives received more stock options

relative to the situation where stock options had to be expensed. Since they found these results after

controlling for economic factors and trends, their overall conclusion is that accounting is a determinant

in the design of executives compensations.

4.2.4 Choudhary (2008)

Choudhary (2008) investigates how the composition of compensation contracts change with respect to

adopting the fair value method. He focuses on the shift from disclosed amounts under the intrinsic value

method to recognized amounts under the fair value method, and emphasizes how managers react to

recognition and disclosures, and how this impacts compensation contracts. To analyze the change in ESO

compensation he uses the following regression:

Δ Log (# Option grantit) = δ0 + δ1Δ Log (Sales)it + δ2 Δ ROAit + δ3 Returnit + δ4 Post Voluntaryit + δ5

Mandatoryit + δ6 Δ Volatilityit + δ7 Dependent Variableit-1 + Σδj(yearit) + eit

He tests for changes for three groups in the dependent variable, namely CEO, non-CEO executives, and

rank and file employees (i.e. non-management employees). He controls for size (sales), performance

(ROA and returns), stock price volatility (volatility), and includes two dummy variables (post voluntary,

and mandatory). The Post Voluntary dummy variable indicates whether firms reduced stock option

compensation in 2005.

To test whether stock options are substituted for other forms of compensation (e.g. restricted stock), he

uses a regression of Core and Guay, and modified it to:

Log (New incentive grant +1)jt = δ0 + δ1(Incentive residualjt-1) + δ2Log (Salesjt-1) + δ3(BTMjt-1) + δ4(NOLjt-1) +

δ5(CF shortjt-1) + δ6(Div constraintjt-1) + δ7(RETjt) + δ8(Volatilityjt) + δ9(Accounting Treatmentjt)+

δ10(Voluntary*2005jt) + Σδ11(Industryjt) + ejt

The dependent variable is equal to stock option compensation, restricted stock, or total compensation

depending on what to test. The dummy variables net operating loss (NOLjt-1) equals 1 if there was an

operating loss in the past three years, dividend constraint (Div constraintjt-1) indicates whether the ratio

of retained earnings, cash dividends, and share repurchases divided by past year’s cash dividends and

share repurchases is less than two of the past three years, industry controls ( Industryjt) indicates

industries, accounting treatment (Accounting Treatmentjt) equals 1 in case of a fiscal year with

mandatory fair value disclosure, recognition of fair value after June 15, 2006 or if firm is a voluntary



adopter of fair value recognition before 2005. The dummy variable (Voluntary*2005jt) is equal to 1 if the

firm is a voluntary adopter of the fair value method during 2005. Furthermore, he controls for the

optimal level of equity incentives (Incentive residualjt-1), firm sales (Log (Salesjt-1)), book to market ratio

(BTMjt-1), cash flow shortfall (CF shortjt-1), compounded annual return (RETjt), and volatility of returns

(Volatilityjt).

In his tests he uses two time periods: one around 1995 (1994-1996), and one around 2005 (2003-2005).

In 1995 US firms were able to choose between the intrinsic value method, and the fair value method.

Before 1995 the intrinsic value method had to be applied. In order to see the effect of disclosure of ESOs

he took this time period. In 2005 the fair value method had to be applied. To see the effect of

recognition of ESOs he took this time period. His sample consisted of 795 mandatory disclosure firms,

783 mandatory recognition firms, and 127 voluntary recognition firms.

In the first test, he found that the number, fair value, and contractual length of options were reduced

when firms had to adopt the fair value method, but not when firms had to disclose the fair value of

stock options. This is applicable for all three groups that were investigated. The results of the second

test also showed a decrease in ESO compensation when firms had to recognize ESO expenses. At the

same time, the use of restricted stock, bonuses, salary, and other compensation increased significantly.

The control group also increased bonuses, salary, and other compensation, but the increase in restricted

stock compensation was insignificant. These results suggest that the mandatory expensing of ESOs

started a shift from stock option compensation to more restricted stock compensation.

4.2.5 Conclusion

The last three studies have shown that after the introduction of SFAS 123 (R), and thus the mandatory

expensing of stock options, stock option compensation decreased. The increase of restricted stock

compensation was relatively less than the decrease of stock options, which implied that executive

compensation has decreased. The studies of Brown and Lee (2007), Carter et al. (2007), and Choudhary

(2008) also showed that the decrease of stock option compensation is mainly caused by the mandatory

option expensing. Feng and Tian (2007) concluded that the voluntary expensing of stock options caused

a decrease of granted stock options in 2002. Also other events around that time have contributed to the

decrease of stock options. These other events may also have contributed to the adoption of SFAS 123

(R). As Brown and Lee (2007) argue that good governed companies had already adopted the fair value

method and are less likely to decrease stock option compensation relative to companies that had not

adopted the fair value method, shows that accounting change is the primary cause for the decrease in



stock options. Also Carter et al. (2007) showed that accounting change is key in the decrease of stock

option compensation, as they have controlled their finding for economic factors and trends. Choudhary

(2008) also found that compensation contracts were changed, due to SFAS 123 (R). Results showed that

other forms of compensation were not increased, except for restricted stock. Concluding that the

expensing of ESOs caused a shift from stock option compensation to restricted stock compensation in

the United States.

IFRS 2 does not significantly differ from SFAS 123 (R), due to the convergence project of the IASB and

FASB. However, these results cannot be generalized for the Netherlands, since the situation before 2005

in both countries was different. Whereas, US GAAP remained unchanged for all forms of compensation,

but stock options, IFRS 2 involved changes in accounting methods for all forms of equity-settled share-

based payment, including restricted stock. According to chapter 3, the change from Dutch GAAP to IFRS

2 implied expensing the fair value of both stock options and restricted stock. Before 2005, stock options

were expensed at intrinsic value, and restricted stock was not expensed in the profit and loss account at

all. The accounting method for restricted stock under IFRS can, therefore, be seen as a more unfavorable

method compared to Dutch GAAP. This might cause the amount of restricted stock compensation, as

well as stock option compensation to be negatively affected after the introduction of IFRS 2.

4.3 Netherlands-based studies

As partly discussed before, there are two main reasons why the US-based empirical literature may not

be generalized to a Dutch context. First, the guidelines provided under Dutch GAAP included a different

accounting treatment for share compensation compared to US GAAP. Whereas US GAAP required

recognition of the fair value of shares granted as remuneration before and after 2005, Dutch GAAP did

not require recognition of fair value before 2005. These guidelines have been changed, due to the

introduction of IFRS 2. Second, the Corporate Governance Codes may differ. The typical Dutch board

structure is a two-tier version, whereas the Anglo-Saxon (i.e. the US, and United Kingdom) board

structure is an unitary one, with executive and non-executive directors in the same board (Swagerman &

Terpstra, 2009 p. 62). To enhance the insight in the consequence of IFRS 2 on the remuneration of the

board of management several empirical studies conducted in the Netherlands will be discussed in this

section.

4.3.1 Swagerman and Terpstra (2009)

Swagerman and Terpstra (2009) have investigated the trend in Dutch executive compensation. Since

2002, Dutch-listed companies are required to disclose information about the remuneration of its board



of management. This legal requirement creates the opportunity for a research to remuneration

practices. Their research is based on a sample of 75 listed companies, of which 71, that met the data

requirements, were included in the final sample. Although there are approximately 150 listed companies

in the Netherlands, they included only the 75 biggest companies for comparability and relevance issues.

The sample period was 2002-2004.

Their findings provided supporting evidence for three trends.

First, the Dutch Corporate Governance Code has had a significant impact on remuneration. An

important factor in the Dutch Corporate Governance Code is that performance measures are

predetermined, measurable, and influential. The evaluation of the performance of an executive board

member is, therefore, more objective than before the Code was introduced. Another impact of the

Corporate Governance Code is that stock options should include a vesting period.

Second, they found a shift from stock option compensation to other forms of share-based payment.

Particularly, stock options were replaced by performance shares. The decrease in stock option

compensation can be explained by the negative reputation that stock options have been given after

accounting scandals in the early 2000’s. Performance shares were considered to be more efficient in

aligning interests of the principals and agents. When share prices have declined stock options are

worthless and there is no payout to executives, because they will not exercise their options. In the case

of performance shares a payout is guaranteed, but has become less, due to the declining share price.

They suggest that the introduction of IFRS 2 has probably triggered the switch from stock options to

performance shares. However, as stated in chapter 2, IFRS 2 was issued in February, 2004. Since the

performance measures were predetermined7, and IFRS 2 was effective in 2005, the proposed causal

relation between the shift and IFRS 2 seems to be arguable.

The third trend was the increase in total compensation, due to an increase in share-based

compensation. They found that executives received more share-based compensation with companies

that have introduced performance share programs in 2003 or 2004. They do not provide a clear

explanation for this.

7 When IFRS 2 was published the remuneration policy should have already been determined. For example, the remuneration with respect to the financial year 2004, should have been determined before the financial year has started. Since this study incorporates the period 2002-2004, and IFRS 2 is published in February 2004, the remuneration policy of the financial year 2004 have been determined already.



Swagerman and Terpstra argue that the introduction of IFRS 2, and the Dutch Corporate Governance

Code have triggered a shift from stock option compensation towards performance shares. The impact of

IFRS 2 is arguable. Additionally, scientific power of the evidence found in this study is not considerably

high, because Swagerman and Terpstra did not perform statistical tests to evaluate the trend and to see

whether the changes are significant.

4.3.2 Thesis Kraakman (2010)

In her master’s thesis, Kraakman investigates whether the introduction of IFRS 2 has led to a decrease in

fair value of options granted to both CEOs and all employees in the Netherlands. Her study focuses only

on stock option compensation and is based on the findings in the US-based studies, which were also

discussed previously in this chapter. Key element in her thesis is that she investigates the fair value of

the stock options granted, and in addition she also investigates the amount of stock options granted.

Her sample consisted of the 75 listed companies on the AEX, AMX, and AScX, of which 34 were

excluded, due to a lack of data or not meeting the data requirements. Her final sample consisted of 41

firms in the period 2002-2007.

The model she uses is based on the Feng and Tian (2007) model, and adjusted for a different dependent

variable and different control variables. The model is specified as:

ESO use for CEOsit = αi + β1TL1t + β2TL2t + β3Investmentit + β4Sizeit + β5Performanceit + β6Leverageit +

β7Liquidityit + β8CEOtenureit + β9Volatilityit + β10Ownershipit + εit

Where (ESO use for CEOsit) is the fair value of stock options granted to the CEO, TL1t and TL2t are the

same time indexes as used in the model of Feng and Tian (2007) with an event year of 2005,

(Investmentit) is the market to book ratio, (Sizeit) is measured by the natural logarithm of assets. In

addition, the return on assets indicates the performance of a company (Performanceit), (Leverageit)

indicates the company’s leverage, liquidity constraints (Liquidityit) are measured by the negative value of

free cash flow divided by total assets, CEO tenure (CEOtenureit), as well as stock volatility (Volatilityit) are

also incorporated. The proportion of common shares owned by the CEO (Ownershipit) is the last control

variable.

She concludes that stock option compensation for CEOs as well as for all employees has significantly

been changed after the introduction of IFRS 2. And that IFRS 2 was the main cause for this declining

trend.



Along her thesis, she identified that more companies use other long-term incentive plans since the

introduction of IFRS 2 in 2005. She suggests that the introduction of IFRS 2, therefore, causes a

substitution from stock option to other forms of equity-based compensation. She does not provide

empirical evidence for this suggestion. Besides, she documents only the number of companies that have

other forms of equity-based compensation plans, and not the fair value of equity grants. The number of

companies that introduced other incentive programs is increased, but the amount of remuneration

might be decreased. When the latter is the case, it does not provide support to the substitution of other

her equity-based compensation for stock options.

4.3.3 Conclusion

Both the studies of Swagerman and Terpstra (2009) and the thesis of Kraakman (2010) have investigated

the trend of stock option compensation for 75 listed companies in the Netherlands. Swagerman and

Terpstra (2009) suggest that the introduction of IFRS 2 has caused a shift from stock option

compensation to performance shares in 2003 and 2004. However, IFRS 2 was published in February,

2004. And since they also argue that performance measures are predetermined, this explanation seems

not to hold. Kraakman (2010) found empirical evidence that stock option compensation was decreased

by the introduction of IFRS 2 in 2005. From this study it can, therefore, be concluded that, caused by the

introduction of IFRS 2, stock option compensation has been decreased in the Netherlands. Additionally,

she suggests that the decrease of stock option compensation is made up by other forms of share-based

compensation. Her suggestion is based on the finding of an increasing number of companies that are

granting other forms of equity-based compensation. However, she does not take the value of the other

forms of equity-based compensation into account, and does not support her suggestion with statistical

evidence. Both studies found that stock option compensation are declining over the years. Swagerman

and Terpstra (2009) suggest that the substitution from stock options to other forms of share-based

compensation started in 2003, whereas Kraakman (2010) suggests it started after the introduction of

IFRS 2 in 2005.

4.4 Determinants for remuneration

As a start to develop a research model, this section identifies the determinants of compensation. Since

this thesis deals with fixed salary, bonus payments, and share-based payment transactions, the

determinants for all these forms of compensation should be identified. Chalmers et al. (2006)

empirically researched determinants for CEO compensation, while distinguishing in compensation



components as salary, bonus, options, and shares. Their study is based on an Australian sample of the

top 200 of listed firms at the Australian Stock Exchange.

4.4.1 Size

In the study of Chalmers et al. (2006, pp. 268-269) results showed that firm size, measured by the

natural logarithm of the firm’s assets, was the only significant variable in all forms of compensation. The

relation between size and compensation was positive. Accordingly, they suggest that larger firms will

pay more for the CEO, as the CEO should be of high quality. This is consistent with the studies of Murphy

(1998, p. 6) and Kraakman (2010, p. 67), in which is respectively concluded that levels of compensation

for CEOs and stock option compensation for CEOs increase with the size of the company. Additionally,

Feng and Tian (2007, p. 41) showed that firm size is positively related to the level of cash compensation,

stock option compensation, stock compensation, and total compensation. These results are consistent

with the study of Carter et al. (2007, pp. 341-343) with respect to stock options, stock, and total

compensation. They conclude that larger firms use relatively more restricted stock.

4.4.2 Performance

The amount of stock options, shares, and bonus payments are dependent on predetermined

performance measures. One of these might be the performance of the firm. In the study of Chalmers et

al. (2006, pp. 268-269) the firm performance, measured by return on assets, is positively related with all

compensation forms, but shares. Kraakman (2010, pp. 67-68) also measures performance by return on

assets. She finds a positive association with stock option compensation. Feng & Tian (2007, p. 41) and

Carter et al. (2007, pp. 341-343) found the past stock return is related to total compensation, and stock

compensation. Feng and Tian (2007, p. 41) also found that past stock return is positively associated with

cash compensation. In addition, Carter et al. (2007, pp. 341-343) found that past stock returns are

positively related to stock option compensation. However, they conclude that better performing firms

use relatively more restricted stock compensation. Whereas Feng and Tian (2007, p. 41) found a

negative, but insignificant, relation.

4.4.3 Risk

The results of Chalmers et al. (2006, pp. 268-269) and Feng and Tian (2007, p. 40) show that option

compensation is more pervasive in riskier firms. For shares, however, Chalmers et al. (2006, pp. 268-

269) find the opposite relation. In both studies risk is measured by the standard deviation of the stock

market return. However, the results in the study of Kraakman (2010, p. 69) were not significant.

Choudhary (2008, p. 43) used the volatility of the share price as a proxy for risk. His results indicated



that volatility is a significant determinant for both stock options and shares. According to Murphy (1998,

p. 17) granted stock options provide incentives to executives to engage in riskier investments, as the fair

value of stock options are positively related with the share price volatility.

4.4.4 Growth opportunities

Chalmers et al. (2006, pp. 268-269) and Kraakman (2010, p. 67) found that growth opportunities, in both

studies represented by the market to book ratio, is positively related to option compensation. In

addition, Chalmers et al. (2006, pp. 268-269) found that shares, and total compensation are also

positively associated with growth opportunities. Whereas it should be noted that the total

compensation is also dependent on options and shares granted. They provide two explanations. First,

granting stock compensation should tackle monitoring problems that arise when management uses

private information for investment decisions. Second, high growth opportunity companies have less

cash, and, therefore, use stock option and shares as compensation more often. This is consistent with

the findings of Core and Guay (2001, p. 275) that companies with cash constraints use stock option

compensation relatively more. Bryan et al. (2000, p. 684) argue that shares are not as efficient as stock

options for firms with growth opportunities.

4.4.5 Corporate Governance

Chalmers et al. (2006, pp. 264-269) examine the influence of different factors of governance on

compensation. These factors include whether the CEO is the chairman of the board of directors, board

size, non-executive directors, non-executive directors with related party transactions, and whether the

firm has appointed a remuneration committee. They found that board size is positively related to total

compensation, fixed salary, and bonus payments. In addition, the number of non-executives with related

party transactions is negatively related to fixed salary, but positively related to bonuses. The

appointment of a remuneration committee would have a positive effect on stock option compensation,

but has a negative relation to shares.

4.4.6 Financial constraints

Core and Guay (2001) investigated stock option compensation for non-executive employees. They state

that firms with financial constraints grant non-executives with stock options more relative to other

companies as a means of internal financing. The same applies for stock option compensation for CEOs.

According to Yermack (1995, pp. 24-25), Bryan et al. (2000, p. 663) and Feng and Tian (2007, p. 41)

companies facing liquidity constraints use relatively more stock options as remuneration for CEOs.

Kadan and Swinkels (2008) found a relation between several proxies for default risk and the probability



of using specific forms of compensation for a panel of American firms. Companies with signs indicating a

high likelihood of bankruptcy will make relatively greater use of share compensation. Eventually, when

they have emerged from the risk of bankruptcy, they will use stock option compensation more

intensively. However, the studies of Carter et al. (2007, pp. 341-343) and Kraakman (2010, pp. 68-69)

found no significant relationships.

4.4.7 Industries

Murphy (1998, pp. 5-6) and Yermack (1995, p. 20) found that pay levels are dependent on industries.

They found that in regulated industries the level of CEO pay is lower, and stock option compensation is

used less intensively.

4.4.8 Ownership

The study of Chalmers et al. (2006, pp. 268-270) show that the percentage of the shareholding of the

CEO is negatively related to all forms of compensation, except for shares, which are positively

associated. They suggest that it is caused by the existing alignment effects. When a CEO has a higher

stake in the shares of the company his interests will be automatically aligned with those of the other

shareholders. Inconsistent with this view, Yermack (1995, pp. 20-21) found that the percentage of

shares owned by CEOs is not significantly related to stock option compensation in the United States. In

the Netherlands, the study of Kraakman (2010, p. 69) shows that ownership of the CEO is also not

significant in the Netherlands.

4.4.9 Insignificant variables

This section elaborates on which variables that are investigated in previous studies turned out to be

insignificant (α = 5%) or are not prevalent. As these insignificant variables are considered to be irrelevant

in determining compensation, these variables will not be used in the research model. As a small sample

implies a small selection of control variables, the least prevalent ones are not included in the research

model.

Kraakman (2010, pp. 68-69), and Feng and Tian (2007, p. 40) found that leverage is an insignificant

determinant for compensation, as well as CEO tenure. The results of Choudhary (2008, p. 47) showed

that dividend constraints, and net operating loss are not explaining the value of remuneration at a

significance level of 5%. Other variables like the deviation from optimal incentive level and equity

constraints are only investigated in the study of Carter et al. (2007), and are, therefore, not considered

to be prevalent enough to also incorporate those variables.



4.4.10 Conclusion

According to the findings of existing literature as discussed in this section, the level of compensation is

dependent on several determinants. Size and growth opportunities belong to the most prevalent

determinants. In all studies discussed in this section, both size and growth opportunities are positively

related to compensation. The results of performance and risk are both contradicted by one study. The

corporate governance indicates that board size is positively related to compensation forms. The board

size might be a proxy for the complexity of a firm, which might indicate that directors of more complex

firms are granted with higher remuneration. There is mixed evidence on financial constraints and

ownership structure as determinants for compensation. Different industries are a significant

determinant for compensation. The determinants found in this section will form the basis for the

development of the research model, as it will be discussed in the next chapter.



Chapter 5: Research design

The literature review in the previous section does not provide a clear answer to the research question,

as formulated in the introduction of this thesis: Has IFRS 2 caused a substitution from stock option

compensation to other forms of compensation for Dutch-listed companies? It can be concluded that the

mandatory adoption of the fair value method for stock option compensation caused a substitution from

stock options to restricted stock to compensate employees in the United States. These results can,

however, not be generalized to the Dutch institutional setting, as appeared from chapter 3. In

conducting a specific research to the substitution from stock option to other forms of compensation the

research design of this empirical research is discussed here. First the hypothesis of my empirical

research is stated. The second section elaborates on the sample items and period. In the third section a

new research model is developed, since the previously discussed models do not qualify to be used in this

research.

5.1 Hypotheses development

The studies of Feng and Tian (2007), Carter et al. (2007), Brown and Lee (2007), and Choudhary (2008)

indicate that (voluntary and mandatory) expensing of stock options has caused a decrease in the level of

stock option compensation. In the period 2002-2007 the accounting treatment of other forms of

compensation (e.g. restricted stock, cash, and bonuses) has not changed in the United States (Brown

and Lee, 2007, p. 5). The situation in the U.S. made it ideal to study the effect of the introduction of

mandatory expensing of the fair value of stock options in 2005. Additionally, the findings of Carter et al.

(2007), Brown and Lee (2007), and Choudhary (2008) provide evidence that the composition of

remuneration has changed since the introduction of SFAS 123 (R) in 2005. All three found that stock

option compensation has been substituted for by restricted stock compensation. Mandatory expensing

of the fair value of stock options by the introduction of SFAS 123 (R) is held accountable for this shift in

composition of remuneration. Hall and Murphy (2003) say that in theory restricted stock compensation

is preferred to stock option compensation. They suggest that the favorable accounting treatment of

stock options before 2005 has made stock options a more preferable form of compensation. In 2005 the

extra benefit of stock option (i.e. recognition of intrinsic value) was disposed with the introduction of

SFAS 123 (R), involving the costs of stock options should outweigh the benefits in theory. Accordingly,

stock option compensation has been substituted by restricted stock.



The setting in the Netherlands is different compared to the setting in the United States. In the period

before 2005 Dutch-listed companies had to comply with Dutch GAAP, and since 2005 with IFRS. As

stated in chapter 3, Dutch GAAP required the adoption of the intrinsic value method for stock option

compensation, similar to US GAAP. IFRS 2, in accordance with SFAS 123 (R), requires that the fair value

method to account for stock option compensation should be applied. The intrinsic value method is seen

as a more favorable method, as the recognized compensation cost can easily be determined at null,

implying no impact on the profit and loss account. Whereas, the application of the fair value method for

stock options will always show costs in the profit and loss account. The accounting principles for stock

options have become less favorable since 2005 in both the Netherlands and the United States.

Basically the same happened with granted shares in the Netherlands. Whereas the FASB has not

changed its guidelines on stock compensation, the mandatory adoption of IFRS caused a change in

guidelines for listed companies the Netherlands. The guidelines of Dutch GAAP did not require the

recognition of fair value of shares as US GAAP did before 2005. In Dutch GAAP the face value of granted

shares was deducted from the reserves, implying no impact on the profit and loss account. IFRS 2

requires the recognition of the fair value of granted shares in the profit and loss account. The accounting

method before 2005 can be seen as a more favorable one, since it did not have an impact on the profit

and loss account. The accounting method required by IFRS can be considered as more unfavorable

compared to the method before 2005.

While US-based studies found a substitution effect from stock option compensation to restricted stock

compensation, it might be questionable if this same substitution will have been taken place in the

Netherlands, since the accounting methods for both share compensation and stock option

compensation changed into less favorable ones8. IFRS 2 might have a negative effect on the fair value of

both granted shares and stock options. The negative effect of IFRS 2 on stock option compensation in

the Netherlands has already been researched by Kraakman (2010), as discussed in the literature review

in chapter 4. However, to be certain that this research captures the same effect, the trend of stock

option compensation is also investigated. Additionally, the possible decrease of share compensation and

stock option compensation might be made up by other forms of compensation (i.e. fixed salary, and

cash bonuses). The fair value of granted stock options is expected to decrease after the adoption of IFRS,

8 The fair value method for both granted stock options and shares are considered to be less favorable, because it results in lower profits compared with the period before 2005. The applied accounting method for granted shares in the Netherlands before 2005 had no effect on the profit and loss account, nor on the debt to equity ratio. The intrinsic value method for stock options required the recognition of the difference between share price and exercise price, which equals to zero in most cases (Hull and White, 2004).



as well as the fair value of granted shares, due to the more unfavorable accounting methods applied in

IFRS. The likely decrease of granted stock options is expected to be made up by other forms of

compensation. Therefore, negative relations are expected between the change in granted stock options

and the level of fixed salary, and cash bonuses. The following hypotheses have been developed to test

for these possible effects:

H1: The proportion of the fair value of stock options to total compensation granted to the board of

directors has decreased after the mandatory adoption of IFRS for Dutch-listed companies.

H2: The proportion of the fair value of shares to total compensation granted to the board of directors has

decreased after the mandatory adoption of IFRS for Dutch-listed companies.

H3: The mandatory adoption of IFRS for Dutch-listed companies has triggered a substitution from the fair

value of stock options to fixed salary granted to the board of directors.

H4: The mandatory adoption of IFRS for Dutch-listed companies has triggered a substitution from the fair

value of stock options to cash bonuses granted to the board of directors.

Note that the fair value and the level of compensation are denoted in Euros.

Although there are other forms of share-based compensation, these will not be taken into account. The

other forms of share-based payment include stock appreciation rights, phantom shares, and phantom

stock options. Since these forms are respectively used in 2, 6, and 4 firm years of 264 firm years in the

final sample, and by respectively 1, 2, and 1 firm, the data about these forms is too small to conduct a

proper research.

5.2 Sample

As it is already discussed in my hypotheses and the previous chapters, my research will only include

listed companies in the Netherlands. The reason to incorporate only listed firms is threefold. First, the

remuneration of the board of directors has to be publicly available according to Article 383 in Book 2 of

the Dutch Civil Code. Second, only listed firms are mandatory to apply IFRSs. Third, listed companies are

more likely to grant share-based payments to directors, since other types of business entities do not

have shares, or are restricted by several rules in issuing equity. The sample includes the 73 firms that are

listed on the three main indexes at the NYSE Euronext. The sample is compiled out of 26 firms listed at

the AEX index, 24 listed at the AMX index, and 23 listed at the AScX index. Since the Netherlands lacks a



database with information about remuneration, all remuneration data have to be handpicked from

annual reports.

According to Article 383 in Book 2 of the Dutch Civil Code the remuneration of the board of directors

should be publicly available since 2002. It is, therefore, possible to collect remuneration data from 2002

and later. In order to see a trend in compensation practices before 2005 the sample period includes the

years 2002-2004. To investigate whether the effect of the introduction of IFRS on remuneration is not a

one-time event, the sample period will also include two years after 2005, namely 2006 and 2007. Thus,

the sample period will include the years 2002-2004 where Dutch GAAP is applied, and 2005-2007 where

IFRS is applied.

To incorporate data in the sample, it has to meet certain requirements. Data that does not meet with

these requirements cannot be included in the sample, because they might bias the outcome. For this

research data is only included when:

The firm has been listed at the AEX, AMX, or AScX index during 2002-2007;

Information about at least the granted amounts (in numbers), exercise prices, and expiration date of

stock options to the board of directors is available;

Information about at least the granted amounts (in numbers) of shares to the board of directors is

available;

The firm has applied Dutch GAAP in 2002-2004;

The firm has applied IFRS in 2005-2007;

The firm has not been involved in a significant merger of acquisition that may in itself create a

change in remuneration;

The data for control variables are available.

The data that meets these criteria are included in the final sample, which consists of 44 firms.



Number of companies at starting point: 73

Reason to exclude Frequency

Lacking data on remuneration 5

Not listed for whole sample period 9

Applying other accounting standards 3

Involved in a merger and/or acquisition 2

Lacking data for control variables 9

Daughter company of other listed company 1

Total excluded companies 29

Total 44

The 44 firms in the sample should meet additional requirements to be incorporated in the hypotheses,

since including firms that did not grant stock options to the board of directors might lead to biased

results. The requirements are the same for hypotheses 1, 3, and 4, since they all require granted stock

option compensation. The requirement for hypothesis 2 requires shares to be granted to the board of

directors.

For hypotheses 1, 3, and 4:

The firm has granted stock options to the board of directors in at least one year of the period 2002-

2007.

Of the 44 firms 34 firms meet this additional requirement, leading to a sample size for hypotheses 1, 3,

and 4 of 34 firms.

For hypothesis 2:

The firm has granted shares to the board of directors in at least one year of the period 2002-2007.

For hypothesis 2, 29 firms meet this requirement.

The data about remuneration of the board of management is manually collected from company’s annual

reports. Missing data about share prices are replaced by the year end share price, as retrieved from

Thomson One Banker. For the calculation of the missing fair values of stock options granted to the board

of management the Black-Scholes formula is used, as discussed in section 3.2.1 and Appendix I. In this



thesis it is assumed that dividends are proportional to the share price. Therefore, the dividend yield

retrieved from the Thomson One Banker database can be used in order to calculate Sx. In addition,

information of stock volatility is also available in Thomson One Banker. The risk free interest rates are

not company-specific, therefore the same rates will be used for a specific year. As IFRS 2 prescribes in

section B37, the risk free interest rates are as specified by the Dutch Central Bank (In Dutch: De

Nederlandsche Bank), and are defined as the interest rate on Dutch government bonds.

5.3 Research model

The Dutch accounting standards were different than the FASB standards before 2005. The adoption of

IFRS in 2005 caused a convergence between the IFRSs in the Netherlands and the FASB standards.

Because of the different institutional setting the used research models in the discussed U.S.-based

studies cannot be used to test for a substitution effect in the Netherlands. The study of Feng and Tian

(2007) focuses primarily on the trend of stock option compensation with an event date of 2002.

Additionally, they discuss the trend of other compensation forms briefly without linking it to the trend of

stock option compensation in their model. The models of Brown and Lee (2007), Carter et al. (2007), and

Choudhary (2008) do focus on the substitution effect in 2005, but they incorporate the choice between

the intrinsic value method and the fair value method for stock options in their research models.

Swagerman and Terpstra (2009) did not include a research model in their article. In addition, their

sample period consisted of the period 2002-2004, and the scientific power of this research is

questionable. Kraakman (2010) uses the same model as Feng and Tian (2007). Besides, she studies the

trend of only stock option compensation. All previously discussed studies do not include appropriate

research models for the purpose of this study. However, as they might provide support in developing a

new research model specific to the Dutch institutional setting, the research models are based on the

models discussed in the literature review. Hypotheses 1 and 2 require a different research model

relative to the other three hypotheses. The first two hypotheses are developed to research the trend of

granted stock options and shares to the board of directors. Whereas hypotheses 3, 4, and 5 deal with

the substitution effect of stock options towards other forms of compensation.

5.3.1 Control variables

As discussed in section 4.4, the level of compensation depends on several other factors than only the

accounting treatment applied. To investigate the impact of the change of Dutch GAAP to IFRS on the

level of remuneration, it is necessary to filter out the impact of other factors. The most prevalent factors

will be used as control variables. Since the sample size is small, the research model includes only 7



control variables, as indicated by the literature review in the previous chapter. The control variables

should reduce the influence of other factors on remuneration. The control variables that will be included

in both research models are: size, growth opportunities, performance, risk, board size, and liquidity

constraints. In addition, dummy variables are included to distinguish between different industries. As

the categorical predictor variables in a multiple regression should consist of two categories (Field, 2005,

p. 169), 11 dummy variables are included that can each equal the value of 1 or 0. The next table shows

how the control variables are measured, and which articles use the same measure:

Control Variable Measurement Article

Size (LN_ASSETit) The natural logarithm of a firm’s total

assets

Chalmers et al. (2006, pp. 268-

269), Murphy (1998, p. 6), and

Carter et al. (2007, pp. 341-343)

Growth opportunities

(MTBit)

Market to book ratio (market value of

equity / book value of equity)

Chalmers et al. (2006, pp. 268-269)

and Brown and Lee (2007, p. 17)

Performance (RETit) Past stock returns measured by total

investment return

Feng & Tian (2007, p. 41) and

Carter et al. (2007, pp. 341-343)

Risk (VOLit) Share price volatility Choudhary (2008, p. 43) and

Murphy (1998, p. 17)

Board size (BOA_SIZEit) Number of directors on the board

during the year

Chalmers et al. (2006, pp. 264-269)

Liquidity constraints

(LIQ_CONit)

The three year average of (common +

preferred dividends + cash flow used in

investing activities – cash flow

generated from operations) / total

assets

Feng and Tian (2007, p. 15) and

Core and Guay (2001, p. 259)

Industry dummies

(IND_DUMMit)

Dummy variables for each industry

according to primary SIC codes. See

Appendix IV for a list of primary SIC

codes.

Brown and Lee (2007, p. 18)

For definitions of these variables, as used in the Thomson One Banker database, and for calculations see

Appendix III.



5.3.2 Model specification for hypotheses 1 and 2

For testing hypotheses 1 and 2 a research model that will control for the influence of each year of the

period 2002 until 2007 on the proportion of the fair value of stock option compensation and share

compensation of total compensation. Scaling the fair value of stock options by total compensation

automatically involves controlling the amount of stock option compensation and share compensation

for an changing total compensation. A declining proportion of, for example, the fair value of granted

stock options of total compensation means that the fair value of granted stock options is declining faster

than total compensation. This suggests that stock options have become less prevalent as a

compensation form. A faster increase of the fair value of granted stock options compared to total

compensation suggests that stock options have become more prevalent as compensation form.

The proportion of the fair value of granted stock options to the board of directors of total compensation

in year t for firm i is calculated as:

PR_FV_STOit = Fair value of granted stock options¿

Total compensation¿

The proportion of the fair value of granted shares to the board of directors of total compensation in year

t for firm i is calculated as:

PR_FV_SHAit = Fair value of granted shares¿


Where the total compensation in year t for firm i is calculated as follows:

Total compensationit = granted fixed salaryit + granted cash bonusesit + fair value of granted stock

optionsit + fair value of granted sharesit

The research model to test for the first two hypotheses includes dummy variables that will control for

the influence of the years 2002 until 2007. Therefore, the model will include dummies for the years

2003, 2004, 2005, 2006, and 2007. When each year dummy is zero it indicates the year 2002. A

significant value of a year dummy suggests that the composition of remuneration is altered in that

specific year. To concise, the model includes 5 dummy variables for the time period and an additional 11

dummy variables to distinguish among different industries, as listed in Appendix IV.



The ordinary least squares regression model for stock options specifies as:

(1): PR_FV_STOit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6 LN_ASSETSit + β7 MTBit + β8

RETit + β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑ IND_DUMMit + ɛit

And for shares as:

(2): PR_FV_SHAit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6 LN_ASSETSit + β7 MTBit + β8

RETit + β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑ IND_DUMMit + ɛit

These research models should reflect a trend in the proportion of stock option compensation and share

compensation, while controlling for other factors of remuneration. Since IFRS 2 is expected to have a

negative influence on the dependent variables of both models, the year dummy for 2005 is expected to

be negative. For the other year dummies the relation to the proportion of stock options is unknown. It is

expected for both models that the natural logarithm of assets (LN_ASSETit), as a proxy for size, is

positively associated with the dependent variables in accordance with Murphy (1998, p. 6), Carter et al.

(2007, pp. 341-343), and Chalmers et al. (2006, pp. 268-269). The market to book ratio serves as a proxy

to measure growth opportunities (MTBit). Since the share price is expected to reflect a company’s future

earnings, a high market to book ratio will imply high growth opportunities. The expected relation is

positive, as Chalmers et al. (2006, pp. 268-269) also indicated. The performance of a company (RETit),

measured by stock returns, is expected to be positively related to the dependent variables. According to

the Dutch Corporate Governance Code the level of remuneration should be related to, for example, the

share price performance. High share returns might, therefore, influence the level of granted stock

options and shares. According to Murphy (1998, p. 17), executives with stock options are provided with

more incentives to engage in riskier investments, resulting in a riskier firm with volatility (VOLit) as proxy.

In addition, Chalmers et al. (2006, pp. 268-269) and Feng and Tian (2007, p. 40) showed that riskier

firms, use relatively more stock options. However, Chalmers et al. (2006, pp. 268-269) found stronger

evidence for the opposite relation regarding shares. In the case of stock options the profit at exercising

is either the share price less the exercise price or nothing, whereas the gain of granted shares is always

the share price. Having stock options are, therefore, riskier than shares. Therefore, I expect the same

results as Chalmers et al. (2006), Murphy (1998), and Feng and Tian (2007) have found regarding stock

options. And the same results as Chalmers et al. (2006) have found regarding share compensation.

Although Chalmers et al. (2006, pp. 264-269) found that board size (BOA_SIZEit) is positively associated



with only fixed salary, cash bonuses, and total compensation, I expect that this would also be the case

with stock options and shares. High liquidity constraints, synonymous with cash shortage, will use

relatively more stock options (Core and Guay, 2001, p. 275; Yermack 1995, pp. 24-25; Feng and Tian,

2007, p. 41) and shares (Kadan and Swinkels, 2008, p. 477). I expect the same relations regarding stock

options and shares of liquidity constraints (LIQ_CONit). Since the industry dummy variables (∑

IND_DUMMit) are categorical dummies I will not predict a relation.

Expected relation for the model with the dependent variable:

Independent variable PR_FV_STOit PR_FV_SHAit

LN_ASSETSit + +

MTBit + +

RETit + +

VOLit + -

BOA_SIZEit + +

LIQ_CONit + +

5.3.3 Model specification for hypotheses 3 and 4

Hypotheses 3 and 4 require adjustments with respect to the previous model. In these hypotheses there

is a direct link between the change in the proportion of stock option compensation and respectively

fixed salary, and cash bonuses. This implies that the change in granted fair value of stock options should

be incorporated in the research model. The model of Brown and Lee (2007) does incorporate an

explanatory variable indicating the change in stock option compensation, namely Δ(ESO). Their

dependent variable can be the change in either salary, bonus, restricted stock, long-term incentive

payments, other annual compensation, or all other compensation. Accordingly, the model of Brown and

Lee (2007) does also investigate the substitution from stock options to other forms of compensation.

Partly based on the model of Brown and Lee (2007), the research model for hypotheses 3 and 4 include

a similar dependent variable and explanatory variables for testing the substitution effect of stock option

compensation. In addition, it provides an indication if the substitution is accelerated in the period after

mandatory adoption of IFRS. In order to show the change in the composition of remuneration, the

change in the proportion of, respectively, the granted fair value of stock options, fixed salary, and cash

bonuses have to be calculated. The change for in the proportion of all three compensation forms for

firm i in year t is calculated as:



Δ PR_FV_STOit = PR_FV_STOit*100 % - PR_FV_STOit-1 * 100 % = Fair value of granted stock options¿

Total compensation¿*

100 % - Fair value of granted stock options¿−1

Total compensation¿−1* 100 %

Δ PR_FIX_SALit = PR_FIX_SALit * 100 % - PR_FIX_SALit-1* 100 % = Granted ¿ salary¿¿


* 100 % - Granted ¿ salary¿−1¿

Total compensation¿−1* 100 %

Δ PR_CSH_BONit = PR_CSH_BONit* 100 % - PR_CSH_BONit-1* 100 % = Grantedcash bonus¿Total compensation¿

* 100 % -

Grantedcash bonus¿−1

Totalcompensation¿−1* 100 %

The dependent variable indicates the change of other forms of compensation due to the change of

granted stock options, these are Δ PR_FIX_SALit and Δ PR_CSH_BONit for the change in proportion of

fixed salary and cash bonuses respectively. The change in the proportion granted fair value of stock

options of total compensation is expressed in the regression model as Δ PR_FV_STOit for firm i in year t.

In addition, the research model includes the same control variables, as model (1) and (2).

The change in the proportion of the fair value of granted stock options ( Δ PR_FV_STOit), granted fixed

salary (Δ PR_FIX_SALit), and granted cash bonuses (Δ PR_CSH_BONit) for 2002 involves data about

remuneration in 2001. Since Article 383 in Book 2 of the Dutch Civil Code has been effective since 2002,

many companies did not disclose information about specific forms of remuneration granted to the

board of management. In the current sample 23 companies did not disclose remuneration practices in

2001. Since the final sample of 44 companies is relatively small, another reduction with 23 companies

leads to a sharp decrease of the representativeness of the sample. Although incorporating 2001 gives

more insight in the trend of remuneration practices, I prefer to exclude 2001 to ensure the

representativeness of the sample, and more reliable results. To conclude, the sample period consists of

the change in years: 2002-2003, 2003-2004, 2004-2005, 2005-2006, and 2006-2007.

Investigating whether the introduction of IFRS 2 has resulted in a substitution from granted fair value of

stock options to other compensation forms, implies including dummy variables in the research model to

indicate the period. Separate dummy variables are included for the changes in the years 2004-2007 and

2003 serves as the base year, as can be seen in the regression model below.



To avoid confusion with the research models (1) and (2) alpha symbols are used instead of betas. The

ordinary least squares regression model for hypotheses 3 regarding the change of the proportion of

fixed salary is:

(3): Δ PR_FIX_SALit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6 LN_ASSETSit + α7

MTBit + α8 RETit + α9 VOLit + α10 BOA_SIZEit + α11 LIQ_CONit + ∑ IND_DUMMit + ɛit

And for the change of the proportion of cash bonuses:

(4): Δ PR_CSH_BONit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6 LN_ASSETSit +

α7 MTBit + α8 RETit + α9 VOLit + α10 BOA_SIZEit + α11 LIQ_CONit + ∑ IND_DUMMit + ɛit

As also stated in hypotheses 3 and 4, I expect a negative relation between the change in fair value of

granted stock options (Δ PR_FV_STOit) and the dependent variables for fixed salary (Δ PR_FIX_SALit), and

cash bonuses (Δ PR_CSH_BONit). It can be concluded that the change in the fair value of granted stock

options is substituted by other forms of compensation when regression results show that α1 is

significantly negative. The year dummies should indicate whether the introduction of IFRS 2 has had an

accelerating effect on the substitution from stock option compensation towards other compensation

forms. The stronger substitution effect is twofold. Either the nominator is increased, or the denominator

is decreased. As illustrated by:

α1 = substitution effect = ΔPR¿¿

ΔPR¿¿ or

ΔPR¿¿

ΔPR¿¿

Substitution effect ↑= ↑ΔPR¿¿

ΔPR¿¿ or

↑ΔPR¿¿

ΔPR¿¿ or

ΔPR¿¿

↓ΔPR¿¿ or

ΔPR¿¿

↓ΔPR¿¿

Accordingly, when the change in the proportion in either fixed salary or cash bonus is increasing the

substitution effect is also increasing, and when the change in the proportion of stock options is

decreasing the substitution effect becomes larger. When α3 is significantly and α2 is not, it indicates that

the substitution from stock options towards other forms of compensation has been accelerated by the

introduction of IFRS 2. When α3 is significant and α4, and α5 are not, it indicates that the introduction

IFRS 2 has caused a shock-effect in 2005, implying a big change in the composition of remuneration.

When all alphas are insignificant, it might indicate that the introduction of IFRS 2 had no effect and that

other factors played a role. I expect that the market to book ratio (MTBit) and the share price volatility



(VOLit) are positively related to cash bonuses, but not to fixed salary proportion. Because empirical

evidence suggests that share-based compensation are more prevalent and efficient in firms with growth

opportunities (Chalmers et al. (2006, pp. 268-269), as well as for highly volatile firms (Chalmers et al.,

2006, pp. 268-269; Feng and Tian, 2007, p. 40; Choudhary, 2008, p. 43; Murphy, 1998, p. 17), it can be

expected that a decrease in proportion of stock options is made up by other forms of performance-

related pay (e.g. cash bonus), and not by fixed salary. The effect on the change in proportion of fixed

salary is expected to be negative, implying a weaker substitution effect. Firms with liquidity constraints

(LIQ_CONit) tend to use share-based compensation in lieu of cash, because it does not require a cash

outflow. (Yermack, 1995, p. 24-25; Feng and Tian, 2007, p. 41; Kadan and Swinkels, 2008; Core and

Guay, 2001). It can be expected that this high liquidity constraint firms do not have additional cash for

additional fixed salary or cash bonuses. Therefore, the liquidity constraints-variable is expected to have

a negative effect on the change in proportion of both fixed salary and cash bonuses. A high proportion of

cash bonus payments are considered to be dependent on a good market performance, measured by

stock returns (RETit). It is, therefore, expected that high share returns have a positive effect on the

change in the proportion of cash bonus, but not on the change of fixed salary. The natural logarithm of

assets (LN_ASSETit), and board size (BOA_SIZEit) have unknown relations with the dependent variables.

The relation of the industry dummy variables (∑ IND_DUMMit) is not predicted, since those are

categorical.

Expected relation for the model with the dependent variable:

Independent variable Δ PR_FIX_SALit Δ PR_CSH_BONit

Δ PR_FV_STOit - -

LN_ASSETSit ? ?

MTBit - +

RETit - +

VOLit - +

BOA_SIZEit ? ?

LIQ_CONit - -

5.4 Conclusion

Complementary to the studies of Brown and Lee (2007), Carter et al. (2007), and Choudhary (2008) the

substitution effect of the decrease of stock options will be investigated in this thesis. The first hypothesis



is formulated in order to test for the expected decline of stock options as remuneration. In addition, in

the second hypothesis, it is expected that share compensation has also declined, since the accounting

treatment of shares has also become less favorable to companies with the introduction of IFRS 2.

Hypotheses 3 and 4 are focused on the substitution of stock options by an increase in fixed salary and

cash bonus respectively. Although hypotheses 1 and 2 require a different sample, the research model is

the same, except for the dependent variable. For hypotheses 3 and 4 the same sample is used as for

hypothesis 1. In the regression model the change in proportion of stock options is added and the

dummy variable for 2003 is removed. As also appears from the hypotheses, it is expected that IFRS 2 has

triggered an abnormal substitution from stock options to fixed salary and cash bonuses, while

controlling for economic factors, like size, growth opportunities, stock returns, risk, complexity of the

firm and liquidity constraints, and industry influences by primary SIC codes.



Chapter 6: Results

The previous chapter discussed the research model to determine whether stock option compensation

and share compensation has decreased after the introduction of IFRS 2 in 2005, and if stock options are

substituted for by another type of compensation. This chapter shows the statistical results of the

regression models, sequenced by hypothesis 1 to 4.

6.1 Results on hypothesis 1

This section shows results on hypothesis 1. In this hypothesis the proportion of the fair value of granted

stock options of total compensation is expected to decrease after IFRS 2 became effective in 2005. As

stated in section 5.1 the hypothesis is as follows:

H1: The proportion of the fair value of granted stock options to the board of directors of total

compensation has decreased after the mandatory adoption of IFRS for Dutch-listed companies.

In this section the descriptive statistics and the statistical findings of the regression model together with

the determinants will be discussed respectively.

6.1.1 Descriptive statistics

The sample for hypothesis 1 includes 34 listed companies. Table 1 in Appendix V shows how the

companies are divided among different industries. Of these 34 companies the manufacturing industry is

most represented with 13 companies. The agricultural, forestry and fishing industry, public

administration, and nonclassifiable establishments are not represented in the sample. Consequently, the

dummy variables for these three categories are not incorporated in the industry dummies in the

research model. Table 2 and Figure 1 in Appendix V displays descriptive statistics on the proportion of

the fair value of granted stock options of total compensation. In the 34 companies in the sample the

average proportion of granted fair value of stock options per year is approximately 14 % of total

compensation, with a minimum of 0 % and a maximum proportion of 67 %, as one can see from Table 2.

According to Figure 1, a proportion between 0 % and 5 % is by far the most prevalent proportion in 204

firm years. As in 66 firm years no stock options were granted to the board of directors, this is not a

surprising result. The trend of the proportion of the fair value of granted stock options to total

compensation is displayed in Figure 2. The average proportion was at a minimum in 2005, the same year

in which IFRS 2 was effective. This might be caused by IFRS 2. However, this cannot be concluded from



this chart alone. The proportion has a decreasing trend from 2003 to 2005, but has an increasing one

from 2006 to 2007.

6.1.2 Statistical findings and analysis

This section discusses the statistical evidence to determine whether hypothesis 1 should be accepted or

rejected. In section 5.3.2 the research model for hypothesis 1 is specified as:

PR_FV_STOit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6 LN_ASSETSit + β7 MTBit + β8 RETit +

β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑ IND_DUMMit + ɛit

It is important to keep in mind that the regression model distinguishes among each year in the period

2002-2007. The year 2002 is the starting year. Consequently, influences of other years (2003-2007) are

indicated by the dummy variables for each year. Appendix VI shows the output of the regression model.

Note that because of the small sample size, a significance level of 10 % is used. There are 7 dummy

variables included in ∑ IND_DUMMit. Since the manufacturing industry is best represented, it will serve

as the base value for comparison among different industries. Any significant industry dummy involves a

significant deviation from the proportion of stock options in the manufacturing industry.

Table 3 in Appendix VI shows a R2 of 0.141, implying an explanatory power of the regression model of

14.1 %. Although the regression model explains only 14.1 % of the variance of the proportion of the fair

value of granted stock options, the results of the ANOVA test in Table 4 show a p-value of 0.051, which is

less than the significance level of 10 %, indicating that the regression model is significant.

As from Table 5 in Appendix VI appears, the dummy variable for 2003 is insignificant with a p-value of

0.4729. This suggests that the year 2003 has not got significant influence on the proportion of stock

options to total compensation. For the years 2004, 2005 and 2006 the p-values (respectively 0.047,

0.018, and 0.015) are significant at a 10 % significance level. The unstandardized betas are all negative (-

0.072, -0.098, and -0.095 respectively), which provide support for a decline in the proportion of stock

options to total compensation starting in 2004, while controlling for industry influences and economic

factors. The stronger p-values and lower unstandardized betas of 2005 and 2006 compared to 2004

suggest that 2005 and 2006 had a greater impact on the decrease in proportion of stock option

compensation. The dummy for 2007 is slightly insignificant (p-value of 0.109). The significantly negative

beta for 2005 coincides with the expectations. The significantly negative beta for 2004 indicates that the

9 As the hypothesis is one-sided, the p-values should also be one-sided, which are stated in the most right column of the coefficients table labeled as Sig. 1-tailed in the Appendix.



negative trend for stock option compensation already started in 2004, with a decrease of approximately

7 %-points compared to 2002 and 200310. The betas for 2005 and 2006 show that the already declining

trend dropped with almost 10 %-points in 2005 and 9.5 %-points in 2006, compared to 2002 and 2003.

Figure 6-1: This figure displays the trend of the

proportion of stock options to total compensation,

according to the unstandardized betas of the regression

model, with a reference proportion of stock options to

total compensation of 30 % in the years 2002, 2003 and

2007. The years 2004-2006 differ significantly with the

reference value of 30%.

Article 383c required companies to disclose the amounts of remuneration granted to the board of

directors. While stock options had a disrepute, due to corporate scandals, and investors were concerned

for excessive compensation (Aboody et al., 2004, p. 153), companies may have been afraid that the

public exposure of remuneration leads to societal pressure to decrease remuneration. However, the

influence of Article 383c on the proportion of stock option compensation can be arguable, since the

proportion in 2003 did not significantly differ from the one in 2002. Although the decline started in

2004, the sharpest decrease in the proportion of stock option to total compensation took place in 2005

and 2006. IFRS 2 was published in February, 2004, after a period of receiving comments on the exposure

draft that was issued in November, 2002. Consistent with Swagerman and Terpstra (2009), the results

show that the prevalence of stock option compensation was declining before 2005. Following

Swagerman and Terpstra (2009), the change in stock option grants in 2004 might indicate that

companies were preparing for the mandatory expensing of stock options. The exposure draft in

November, 2002 made it possible to change the remuneration policy for the next years. On the other

hand, the decline in 2004 might be the result of mandatory compliance with the Dutch Corporate

Governance Code. First, stock options required a vesting period, making it less attractive to directors as

a compensation form. Second, companies had to install a remuneration policy for upcoming years and

10 The base year is 2002. The betas of the year dummies indicate how much the proportion of stock options differs from the base year. The dummy for 2003 is insignificant, suggesting the proportion of stock options has not changed in 2003 compared with 2002.


2002 2003 2004 2005 2006 20070

5

10

15

20

25

30

35

Proportion Stock Options


disclose it in its annual report, causing an even bigger public exposure of remuneration practices. This

may, as well, lead to a decline in granted stock options.

The regression model levels out economic and industry factors that might have an influence on the

proportion of stock option compensation. According to the results, displayed in Table 5 of Appendix VI,

all industries did not have any significant relation to the proportion of stock option compensation in

total compensation. For the economic factors concerned, the natural logarithm of assets and the

market-to-book ratio are significantly positive explanatory variables. Consistent with the expectations,

and the findings of Murphy (1998), Carter et al. (2007), and Chalmers et al. (2006), the size of a

company, indicated by the natural logarithm of assets, explains the value of stock option compensation.

This supports the proposition that larger companies want better directors, who demand higher pay.

Because these better directors expect themselves to increase the share price, they will favor relatively

more stock options in their remuneration (Hall and Murphy, 2003, pp. 56-57), which leads to a higher

proportion of the fair value of stock options in total compensation. The market-to-book ratio stands for

the growth opportunities of a firm. According to Chalmers et al. (2006, p. 268), there are two reasons for

firms with growth opportunities to grant stock options as compensation. The first reason is that it should

tackle the information asymmetry between the shareholder and the manager. Managers in high growth

opportunity firms may have more information than the shareholder, causing information asymmetry

and monitoring difficulties. To mitigate this problem the manager is granted with stock options to align

the interests of the manager with those of the shareholder. The second reason involves the shortage of

financial resources in a growth opportunity firm, which makes these firms tend to grant more stock

options, as there is no cash outflow. Whether the second reason is applicable can be argued, since the

variable for liquidity constraints is found to be insignificant. From the same table, it also appears that

finance, insurance and real estate industry, represented by 4 out of 34 companies, has a significantly

lower proportion of stock options. The services industry, with 8 companies, grant directors with a

significantly higher proportion of stock options. Although these results are significant, one should be

aware of the low number of companies represented by the different industries. Accordingly, these

industry dummies

When performing a statistical regression one should be aware of multicollinearity. A problem arises

when independent variables are mutually related. To see whether multicollinearity is a problem in this

regression model, SPSS includes collinearity diagnostics. The results for this regression model are



displayed in Table 6 in Appendix VI, which shows that the VIF-values of all variables does not arise above

3.031. Since these values are well below 10, multicollinearity does not seem to be a problem.

6.1.3 Conclusion

After controlling for industries and economic factors, the proportion of the fair value of stock options in

total compensation has a declining trend starting in 2004 consistent with the results of Swagerman and

Terpstra (2009). In both 2005 and 2006 the proportion of stock options sharply decreased with 10 %-

points and 9.5 %-points, respectively. As there was no sudden decline in 2005, it is not plausible that

IFRS 2 was the only cause for a declining proportion of stock options. Although the introduction of IFRS 2

might likely cause the sharp decline in 2005 and 2006, the influence of the Dutch Corporate Governance

Code should not be ignored. Presumably, the Code, in combination with Article 383c, led to exposing

remuneration practices of companies to the public and probable social pressure from the public to

change remuneration practices. In particular, the mandatory compliance with the Code since 2004 might

be the main cause for the decline of stock option compensation in 2004, whereas the introduction of

IFRS 2 might be held accountable for the decline in 2005 and 2006. Consequently, the influence of IFRS 2

on the proportion of stock options should not be considered independently, but in combination with the

influence of the Corporate Governance Code. Afraid of social pressure from the public and the less

favorable accounting methods prescribed by IFRS 2, companies might have altered stock option

compensation schemes. Consistent with Murphy (1998), Carter et al. (2007), Chalmers et al. (2006), and

(Hall and Murphy, 2003), bigger companies grant a higher proportion of stock options, because bigger

firms require high quality directors, who are convinced that they are able to increase the share price.

Additionally, high growth opportunity firms suffer from a higher level of information asymmetry. In

order to tackle this problem, managers are often compensated with a relatively higher amount of stock

options, as Chalmers et al. (2006) suggest.


As discussed in chapter 3, Dutch GAAP had a more favorable accounting treatment of shares granted as

remuneration relative to IFRS 2. This suggests that the proportion of shares granted to total

compensation should decline after the effective date of IFRS 2, namely 2005. As stated in the

hypothesis:

H2: The proportion of the fair value of granted shares to the board of directors of total compensation has




This section discusses the descriptive statistics, and the statistical findings on hypothesis 2 combined

with an analysis of the results to provide an insight what effect the change in accounting treatment has

had on the value of granted shares as remuneration.


Testing for the change in composition of remuneration regarding granted shares requires a different

sample, compared to hypothesis 1. Of the 44 firms in the final sample, 29 firms meet the requirement to

be included in the sample for hypothesis 2. As appears from Table 7 in Appendix VII, the sample does

not include any firms from the agricultural, forestry, and fishing industry, as well as from the public

administration sectors. Neither are there any nonclassifiable establishments. Table 8 in Appendix VII

shows that the average proportion of shares to total compensation in 174 firm years is approximately

16.3 % and has a maximum proportion of almost 70 %. As in 64 of the 174 firm years the proportion

shares to total compensation was null, Figure 3 in Appendix VII shows no surprising proportions. In

contradiction to what the theory suggests, Figure 4: Trend of proportion of granted shares to total

compensation in Appendix VII indicates a rising trend in the proportion of shares in the period 2002-

2006. However, economical factors and industry influences might have played an important role in the

trend. This will be discussed in the upcoming section.


The same research model as used in hypothesis 1 will be used, except for the dependent variable, which

is replaced by the proportion of the fair value of granted shares to total compensation ( PR_FV_SHAit).

The research model specifies as:

PR_FV_SHAit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6 LN_ASSETSit + β7 MTBit + β8 RETit +

β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑ IND_DUMMit + ɛit

Because the manufacturing industry is best represented by 11 of the 29 companies, it serves as the base

value for the industry dummies. Again, the year 2002 serves as the base year to which the other years

are compared. The R2 given in Table 9: Summary of SPSS model in Appendix VIII, indicates that 36.4 % of

the variance is explained by the research model. Considering the sample size, the explanatory power of

this research model is relatively high. This also confirms the significance of the model in the ANOVA test,

showed in Table 10. With a p-value of 0.000, the research model provides significant results.

From Table 11 in Appendix VIII can be concluded that, while controlling for economic factors and

industry influences, the proportion of fair value of granted shares to total compensation in 2003 has not



significantly changed from the proportion in 2002. The proportions in 2004, 2005, 2006 and 2007

experienced an increase, according to the betas. The proportions of the period 2004-2007 are

significantly above the proportion in 2002 and 2003. This indicates that the rising trend in the proportion

of shares has started in 2004. In contrast to what the theory predicts, the proportion of share

compensation has not declined, but has actually increased. The betas for 2004 and 2005, as well as the

betas for 2006 and 2007 do not differ much. Whereas the difference between the betas for 2005 and

2006, suggests that the increasing trend has accelerated in 2006. Figure 6-2 shows the trend in

proportion of granted shares.

Figure 6-2: This figure displays the trend of the

proportion of granted shares according to the

unstandardized betas in the regression output. The

proportion for 2002 and 2003 are equal. Whereas the

proportions increased in 2004 and 2006. For

reference a proportion of 30 % is used in the base

year 2002.

The findings on hypothesis 1 suggest that a declining trend of the proportion of stock options has

started in 2004. Consistent with this, the trend of the proportion of shares granted also changed

significantly in 2004. The increased proportion of shares suggest that, from 2004, the decrease of stock

options as part of remuneration is made up with shares. It seems that the introduction of IFRS 2 is of no

influence on the trend, because it was introduced in 2005 while the trend started in 2004 and the betas

of 2004 and 2005 do not differ much. As the analysis on the results of hypothesis 1 says, companies

might want to prepare themselves for the new accounting treatments of IFRS 2. Combined with the

influences of Article 383c and the Dutch Corporate Governance Code, leads to the decline of the

proportion of stock options. In the views of Brown and Lee (2007), Carter et al. (2007), Choudhary

(2008), and Swagerman and Terpstra (2009) a declining trend of granted stock option compensation is

made up by share compensation. The Code and the introduction of IFRS 2 can be considered to have an

indirect effect on share compensation through the decrease of stock options. While in the US the


2002 2003 2004 2005 2006 20070

10

20

30

40

50

60

Proportion Granted Shares


accounting treatment of share compensation has not changed in 2002-2007, it has changed in the

Netherlands since 2005. The study of Swagerman and Terpstra (2009) documented an increased trend in

performance shares in 2003 and 2004. The negative reputation of stock options since the accounting

scandals in 2000’s triggered an increase in performance shares, which were considered as more efficient

in aligning interests. In addition, due to the higher implied risk, directors are granted with more stock

options than it would be the case with shares as a risk premium, making stock options more expensive

relative to shares (Hall and Murphy, 2003; Brown and Lee, 2007). The combined influences of the

relatively low costs of shares and shares being more efficient might explain the stronger preference for

share compensation. However, because directors are granted with more stock options than they would

with shares, one should expect a stronger decrease of stock options than the increase in shares.

However, as the betas of the output of the regression model suggest, shares experience a stronger

increase than the decrease in stock options. In order to verify whether the decreasing preference of

stock option compensation is substituted for by an increasing proportion of share compensation, an

additional test is performed, which is discussed in the next section.

Consistent with expectations, the independent variables for market-to-book ratio (MTBit) and liquidity

constraints (LIQ_CONit) are significantly positively associated with the proportion of shares. The relation

of the market-to-book ratio (p-value of 0.086) on share compensation (and also stock option

compensation) are explained by Chalmers et al. (2006, p. 268), as discussed before, by decreasing

monitoring difficulties and growth opportunity firms having less liquidity. The latter is also seen in the

significant positive variable for liquidity constraints (p-value of 0.093), as also found by Kadan and

Swinkels (2008, p. 477). Since shares as compensation in lieu of cash does not result in a cash outflow,

firms with less liquidity will favor compensation in shares. Although this may suggest that the variables

for liquidity constraints and growth opportunities may be correlated, the collinearity diagnostics in Table

12 in Appendix VIII show that the independent variables are not mutually related. As the highest VIF-

value equals 2.992, the independent variables are all contributing to the regression model.

The expected positive relation of the board size (BOA_SIZEit) to the proportion of shares turns out to be

significantly negative. This suggests that, given that board size is a proxy for the complexity of a

company, more complex firms grant a lower proportion of shares in their remuneration packages. With

respect to the different industries investigated, all industries show a significant difference with the

manufacturing industry, except for the wholesale industry. However, one should take into account that

the sample size is small and that there is only one company for some industries, so no hard conclusions



can be derived. Additionally, the industry dummies are mainly incorporated to control for industry

influences, and not to investigate determinants of compensation.

The total investment return (RETit), share price volatility (VOLit) are not significantly related to the

proportion of shares. For stock options these explanatory variables were also insignificant. This indicates

that the share returns of a company and a high volatility, by e.g. engaging in riskier investment, do not

explain the proportion of both stock option and share compensation. According to Feng and Tian (2007)

agents are risk-averse. As engaging in risky investments yield a high volatility and may influence share

returns, the insignificance of these variables might indicate that directors are not engaging in risky

investments, because they are risk-averse. The size of a company (LN_ASSETSit) is also an insignificant

variable for the proportion of shares, contrasting to the relation to the proportion of stock options.

Suggesting that the proportion of shares is not dependent on the size of the company. This is

inconsistent with the studies of Chalmers et al. (2006, pp. 268-269), Feng and Tian (2007, p. 41) and

Carter et al. (2007, pp. 341-343).

6.2.3 Testing substitution

Contrary to expectations, the proportion of shares seems to have increased since 2004. Taking into

account that stock option compensation has decreased since 2004, suggests that the increase in the

proportion of shares serves as a substitution for the decrease in the proportion of stock options.

Consistent with testing of the substitution effect of hypotheses 3 and 4, as discussed in the next

sections, the same research model is used, which specifies as:

Δ PR_FV_SHAit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6 LN_ASSETSit + α7


When α1 is significantly negative, it illustrates that the change in the proportion of the fair value of

granted shares (Δ PR_FV_SHAit) shows an opposite movement than the change in the proportion of

stock options (Δ PR_FV_STOit). In other words, shares and stock options are substitutes. The dummies

indicate the period, whereby 2004 stands for the change between 2003 and 2004. The change between

2002 and 2003 serves as the base value. Significantly positive year dummies reveal that the base

substitution effect, as indicated by α1, is enlarged. This means that the substitution in the respective

years is accelerated. In order to support that the decrease of stock options is substituted for by shares,

the alphas of the year dummies should be significantly positive. In addition, it controls for several

economic determinants and for different industries.



Since this test for substitution requires the same sample as hypothesis 2, the descriptive statistics are

the same, except for those for the change in proportions. Since the change is measured between two

years, the year 2002 is eliminated from the sample. Consequently, the sample includes 145 firms years.

As from Table 13: SPSS output on descriptive statistics in Appendix IX appears, the mean average change

in the proportion of shares is 3.7 %-points. Additionally, the change of the proportion of shares shows a

somewhat normal distribution (see Figure 5 in Appendix IX). The trend in the proportion of shares seems

to switch between a rapid increase and a low increase, as shown in Figure 6 and Figure 7 in Appendix IX,

whereas the proportion of stock options has decreased rapidly in 2004, whereupon the decrease is

weakened. Both trends do not show the exact opposite of each other. Results from the regression

model should provide a clear answer to whether stock options are substituted for by shares.

As the model predicts only 16.5 % (Appendix X Table 14) of the variance and the ANOVA test shows that

the model an insignificant p-value (Appendix X Table 15: SPSS analysis of variance), the explanatory

power of this regression is questionable. The α1 is with a p-value of 0.003 significantly negative,

indicating that the proportion of shares is a substitute for stock options. The α2 and α4 are significantly

positive. This indicates that in 2004 and in 2006 the substitution from stock options to shares was

greater compared to 2003, 2005 and 2007. This is consistent with Figure 6-2 and the statistical results as

discussed for hypothesis 2, which show that the proportion has strongly increased in both 2004 and

2006. The stronger substitution in 2004 might be explained by the same reason as why the proportion of

stock options has decreased, namely the combination of the Dutch Corporate Governance Code, Article

383c and the preparation for IFRS 2. However, the influence of IFRS 2 is doubtful, as in 2005 the

substitution effect was not significantly stronger than the base year. What caused the significantly larger

substitution in 2006 is uncertain. The introduction of IFRS 2 may have no effect, as well as the Corporate

Governance Code and Article 383c. Accordingly, other factors may have influenced it, like changes in the

behavior of executives.

Consistent with the lack of explanatory power of the regression model, none of the economic

determinants are significantly related to the change in proportion of shares, as displayed in Table 16in

Appendix X. This indicates that the substitution is completely independent from investigated economic

factors and the change in the proportion of shares is completely driven by other factors, of which the

mandatory compliance with the Code and the disrepute of stock options may be possible explanations.

In addition, the industry dummies suggest that the change in all industries, except for the construction

industry, does not significantly differ from the change of the manufacturing industry. Testing for



multicollinearity results to the conclusion that the independent variables are not mutually related (see

Table 17 in Appendix X) and, therefore, do not include the same information about the economic

situation of a company. Consequently, although the independent variables are contributing to explain

the dependent variable, all independent variables are considered to have no significant influence on the

change in proportion of share compensation.

6.2.4 Conclusion

To conclude, the introduction of IFRS 2 does not have a direct significant influence on the proportion of

shares, as the proportion has an increasing trend, while the new accounting treatment under IFRS 2

suggests a decline. However, the introduction of IFRS 2, together with Article 383c and the Dutch

Corporate Governance Code, has a probable direct negative influence on stock options as a part of

remuneration. The results on hypothesis 2 suggest that in 2003 the declining proportion of stock

options, the proportion of shares increased to made up for the decrease in compensation by stock

options. Although the accounting treatment for shares became less favorable in 2005, the benefits of

shares being more efficient and the lower compensation required outweighed the additional recognized

expenses for shares. However, the results of the additional test for substitution does not provide

supporting evidence that the decrease of the proportion of stock option compensation is entirely made

up by an increasing proportion of shares over the whole period 2002-2007. It can be concluded that the

significant decrease of stock option proportion in 2004 is made up by shares. This is consistent with the

study of Swagerman and Terpstra (2009). However, the lower proportion of stock options in 2005 is not

made up by an increasing shares proportion. The stronger substitution effect for 2006 might not be

explained by the aforementioned causes, but might be the result of other factors. The influence of IFRS

2 on the substitution of stock options for shares is, therefore, arguable. The proportion of shares seems

to be related to a firms’ growth opportunities and its liquidity constraints, this is consistent with

Chalmers et al. (2006) and Kadan and Swinkels (2008) suggesting that high growth opportunities firms

have more cash constraints and will, therefore, grant a relatively high percentage of shares. The change

in proportion of shares cannot be explained by the control variables included in the model. This suggests

that the change depends on other, non-economical factors, for example a stronger reputation of shares

relative to stock options, due to the option backdating scandal, as considered by Feng and Tian (2007).


The declining trend of the proportion of stock options to total compensation found in section 6.1

suggests that proportions for other compensation forms are increasing. Hypothesis 3 is formulated to



test for this substitution effect. In this hypothesis the other compensation form is fixed salary.

Hypothesis 3 is stated as:

H3: After the mandatory adoption of IFRS for Dutch-listed companies the decrease of the fair value of

granted stock options has caused an increase in the level of fixed salary to the board of directors.

A change in proportion of stock options between two years is directly related to a change in the

proportion of, in this case, fixed salary. This relation is hypothesized to be accelerated by the

introduction of IFRS 2. Again, the descriptive statistics and the statistical findings and analysis are

discussed, respectively.


The same sample as in hypothesis 1 will be used, which consists of 34 firms among 8 industries. Of which

the manufacturing industry is best represented by 13 firms (see Table 1 in Appendix V). The sample

includes 170 firm years compared to 204 firm years for hypothesis 1. Since there is no data of the year

2001 and the change between 2001 and 2002 is unable to calculated, the year 2002 has been left out.

The average proportion of fixed salary in total remuneration is over 48 % in 170 firm years, and the

average change in proportion is -3.7 %-points, as shown in Table 18 in Appendix XI. The same table

shows that the proportion of fixed salary ranges from 18.9 % to 88.2 %. This is not surprising since a

fixed base salary is an essential part of remuneration. Additionally, the sample incorporates firms that

have granted stock option compensation, implying that the proportion of fixed salary could never equal

100 %. Figure 8: SPSS histogram of distribution of the proportion of fixed salary in Appendix XI shows

that the proportion of remuneration is heavily divided. The change in the proportion of fixed salary is,

however, somewhat normally distributed, as shown in Figure 9 in Appendix XI. According to Figure 10 in

Appendix XI, the proportion of fixed salary has steadily declined throughout the years. The red line

shows the trend of the proportion of stock option compensation. Figure 11 in Appendix XI shows the

difference in proportions between two years. The blue line that indicates fixed salary is, consistent with

Figure 10, shows a negative difference in the entire period. From this figure it seems that the change in

proportions of stock options and fixed salary are not correlated.


Investigating whether the decrease in stock option compensation as part of total remuneration has been

substituted for by fixed salary implies investigating the direct relationship between the change in

proportion of stock options with that of fixed salary. The research model is specified as:



Δ PR_FIX_SALit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6 LN_ASSETSit + α7


The direct relation of the change (i.e. decline) in the proportion of stock option compensation and the

change in proportion of fixed salary is shown in α1. It is hypothesized that α1 is negative, indicating the

change in proportion of stock option compensation and the change in the proportion of fixed salary

have an opposite trend. An insignificant α1 indicates that the change in proportion of fixed salary is not

dependent on the decrease in proportion of stock options. Accordingly, the decrease in proportion of

stock options is compensated by other forms of compensation than fixed salary. The change between

year 2002 and 2003 serves as the base year. The change between 2003 and 2004 is indicated by the

dummy variable α2 2004, and so on. The industry dummies compare the effects of different industries

relative to the manufacturing industry, which serves as the base value again. The research model

appears to have an explanatory power of 37.1 %, as shown in Table 19 in Appendix XII. Considering the

small sample size, this value can be considered as relatively high. Consistently, the ANOVA results (p-

value of 0.000) shown in Table 20 in Appendix XII provide evidence that the research model has

significant explaining power for the sample.

From the results, shown in Table 21in Appendix XII, it can be derived that α1 is significantly negative,

with a p-value of 0.000. The decrease in the proportion of stock options, as found in section 6.1, appears

to be negatively related to the change in proportion of fixed salary for at least the base year 2003. This

suggests that the decrease in stock option compensation, has been made up with an increase in fixed

salary to the board of directors, while controlling for economic factors and industries. The year dummies

indicate to which extent the change in proportion of fixed salary differs from the base year 2003. The

dummy for 2004 gives a p-value of 0.027, which is smaller than the significance level of 10 %. The impact

on change in the proportion of fixed salary for 2004 is, according to the negative alpha coefficient,

significantly lower than for the base year. Whether there is still a substitution effect depends on the

alpha coefficient (in this model estimated as -5.927). The alpha coefficient for 2004 can make the

difference between substitution or a complementary effect. For example, the change in proportion of

fixed salary in 2004 is: Δ PR_FIX_SALit = α1 Δ PR_FV_STOit + α2 2004 = -0.523*-16 + -5.927*1 = 2.441,

while the proportion of stock options has decreased, suggesting a substitution effect. However, when

the α1 Δ PR_FV_STOit is replaced by a lower amount than 5.927, the change in fixed salary proportion is

negative, which indicates a complementary effect. To concise, it is questionable if there still is a

substitution effect in 2004, at least the substitution effect is weaker in 2004. One possible explanation



for this, is that the cutbacks on the proportion of stock options in 2004 are made up by other forms of

compensation. Following the results of the additional test in hypothesis 2, the substitution between

shares and stock options is enlarged in 2004. Indicating that stock options are substituted for by, at least

shares.

The dummies for years 2005, 2006 and 2007 do not significantly differ with the base year (i.e. 2003),

implying a visible substitution effect in 2003, 2005, 2006 and 2007. Since there is no additional effect on

the change of the fixed salary proportion, it can be concluded that the introduction of IFRS 2 has had no

effect on the influence for the years 2005, 2006 and 2007 on the proportion of fixed salary. Taking into

account the analysis in section 6.1 that a combination of IFRS 2 and the Dutch Corporate Governance

code triggered the proportion of stock options to decrease from 2004 and on, and that the decrease in

stock options in 2004 has had a lower influence on the increase of the proportion of fixed salary leads to

the conclusion that the substitution effect was not accelerated by the introduction of IFRS 2.

As Table 21 in Appendix XII displays, the only significant economic factors are the share returns (RETit)

and the size of the board of directors (BOA_SIZEit), with p-values of 0.035 and 0.049 respectively. Share

returns are negatively associated with the change in the proportion of fixed salary. This means that

higher share returns yield a lower change in proportion of fixed salary. To put it another way, in years

when share returns are growing, the change in the part of fixed salary in total compensation does not

increase, but decreases. This suggests that in case of higher stock returns companies grant a higher

proportion of other forms of compensation than fixed salary, concluding that fixed salary is not related

to the firm’s share performance. This is consistent with Hall and Murphy (2003, p. 63), but inconsistent

with the findings of Chalmers et al. (2006, p. 268), who measure the performance as return on assets

(ROA). An important difference is that ROA is an accounting performance measure, whereas the share

returns measure the market performance.

The positive relation of the board size and the change in proportion of fixed salary means that a larger

board size indicates an increase in the proportion of fixed salary. The same relation is found by Chalmers

et al. (2006, p. 268). The amount of members in the board of directors serves as a proxy for the

complexity of a company. More complex firms require a higher quality of labor. Board members than

can deliver higher quality of labor, are demanding a higher compensation, including fixed salary.

However, a higher proportion of fixed salary results in a lower proportion of cash bonuses, stock options

and shares. According to Hall and Murphy (2003, p. 56), and Oyer and Schaefer (2002, pp. 23-27), a

higher proportion of performance related compensation, i.e. cash bonuses, shares and stock options,



makes a company more attractive for managers that think they are able to let the company perform

well. This ultimately results in a higher compensation. Decreasing the proportion of performance related

compensation makes a company less attractive to that kind of managers that could deliver higher quality

of labor. This is contradictory to Chalmers et al. (2006) and the results in Table 21 in Appendix XII.

As from Table 21 in Appendix XII appears, a firm’s size (LN_ASSETSit), growth opportunities (MTBit), risk

(VOLit) and liquidity constraints (LIQ_CONit) do not have significant relations with the change in

proportion of fixed salary. Consistent with the findings of Chalmers et al. (2006, p. 268) firms with

growth opportunities might have more monitoring problems. A fixed salary is considered to be an

ineffective means to tackle monitoring difficulties. Growth opportunity firms are, therefore, looking for

other efficient compensation forms to made up for the decrease in stock options, leaving the change in

fixed salary untouched. Growth opportunities are, therefore, independent of the change in the

proportion of fixed salary. The risk of a company has not been of significance in all previously described

findings. It seems that the company’s risk is not an explanatory variable for fixed salary, shares and stock

options. The insignificance of liquidity constraints might also be explained by firms seeking for other

forms of compensation, than fixed salary, to made up for the decrease in stock options. As fixed salary

results in a cash outflow, liquidity constraint firms are eager to compensate in a way that does not result

in a cash outflow. Consequently, they will not change fixed salary proportion much.

The results of a multicollinearity test will conclude this section. As Table 22 in Appendix XII, the highest

VIF-value is that of the natural logarithm of total assets (VIF = 3.088), whereas the second largest is

slightly above 2. As appears from multicollinearity tests of the previous discussed models, the VIF-value

of LN_ASSETS is consistently above other VIF-values. However, there is no problem of multicollinearity

identified.

6.3.3 Conclusion

The results provide support to the proposition that stock option compensation and fixed salaries are

substitutes in at least 2003, and 2005-2007. Consistent with Hall and Murphy (2003) share returns are

positively related. In addition, the size of the board of directors provide significant explanations, as also

found by Chalmers et al. (2006). Whereas, the change in proportion of fixed salary is independent of

size, growth opportunities, and risk and liquidity constraints. Since the latter three are considered as

incentives for companies to grant share-based payment, this is not a surprising result. The insignificance

of size might be explained by that different companies grant directors with a comparable base salary,

but are competing on performance-related compensation, such as stock options and cash bonuses, to



make a company more attractive (Hall and Murphy, 2003, p. 56; Oyer and Schaefer, 2002, pp. 23-27).

Contrary to the expectations, the dummy variable for 2004 is significantly negative, instead of positive,

which means that in the year 2004 the substitution effect is weakened. Together with the substitution

effect for 2005-2007 is not significantly different from 2003 it can be concluded that the introduction of

IFRS 2 did not have an accelerating effect on the substitution. Consequently, hypothesis 3 is rejected.


The research for hypothesis 4 is constructed in the same as for the previous hypothesis. Accordingly, the

same research model will be used, except for the dependent variable, and a similar hypothesis is

formed. In this hypothesis the substitution effect of the proportion of stock options and the proportion

of cash bonuses is studied, and whether it is triggered by the introduction of IFRS 2. The hypothesis is

stated as follows:


granted stock options has caused an increase in the level of cash bonuses to the board of directors.

Hereafter, the descriptive statistics will be discussed and subsequently the statistical results will be

described together with the analysis of these results.


For this hypothesis the same sample as for hypothesis 3 is used. See for the classification of the

companies Table 1 in Appendix V. The proportion of cash bonuses ranges from 0 to almost 63 %, with an

average percentage of 24.3. A proportion of 63 % for a variable compensation, like a cash bonus, can be

considered relatively high for a performance-related compensation form. The average change in

proportion over 170 firm years is almost 1 %-point, with a minimum of -32.8 %-points and a maximum of

30.1 % points. Figure 12: SPSS histogram of distribution of the proportion of cash bonuses in Appendix

XIII shows that a proportion between approximately 10 % and 34 % is most common. The change in

proportion in Figure 13 in Appendix XIII seems to be quite normal distributed along the 0 %-points

change. Figure 14 and Figure 15 in Appendix XIII display an interesting trend. The proportion in Figure 14

and the change in Figure 15 of cash bonuses seems to have the opposite trend of the proportion and

change in proportion of stock option compensation for at least the period 2002-2006 for the proportion

and 2003-2006 for the change in proportion. The largest increase in proportion of cash bonus and the

largest decrease in the proportion of stock options are both in 2004. In the years when the proportion of



stock option compensation dropped, the proportion of cash bonuses increased. Solely from this figures

cash bonuses and stock options seems to be substitutes.


The interesting relation, as shown in Figure 14 and Figure 15 in Appendix XIII, demands a statistical

analysis, while controlling for economic factors and industry influences, to state whether cash bonuses

and stock options are real substitutes. As with hypothesis 3, the model includes a direct relation

between the change (i.e. decrease as shown in section 6.1) of stock option compensation and the

change in proportion of cash bonus. Accordingly, the regression model is:

Δ PR_CSH_BONit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6 LN_ASSETSit + α7


In order to be considered as substitutes the α1 should be significantly negative. The decrease in

proportion of stock options means that Δ PR_FV_STOit negative. Consequent to a negative value times a

negative value, the change in proportion of cash bonuses (Δ PR_CSH_BONit) is then positive, implying an

increase in the proportion of cash bonuses. To see whether a possible substitution is accelerated by IFRS

2, the model incorporates dummies for different years and takes the change between 2002 and 2003 as

the base year. From Table 24 in Appendix XIV can be derived that the above stated regression model

explains 29.8 % of the variance in the dataset, which is relatively high considering the small sample.

Consistent with this, the overall explanatory power of the model in significant with a p-value of 0.000,

according to Table 25 in Appendix XIV.

Table 26 in Appendix XIV lists the coefficients and their significance of the regression model. The α1,

which was hypothesized to be negative, turns out to be significantly negative (p-value of 0.000). This

indicates that the decrease in the proportion of stock option compensation has led to an increase in the

proportion of cash bonuses. Consequently, cash bonuses and stock options can be considered as

substitutes. As 2003 serves as the base year, the year dummies show the substitution in the respective

years as compared to the base year. Following from Table 26 in Appendix XIV, all dummies are

insignificant. This poses that the substitution effect is not larger than for 2003. Accordingly, the change

in proportion of cash bonuses show no abnormal changes with respect to the change in stock option

compensation. As Figure 14 and Figure 15 in Appendix XIII already showed, the proportion of cash

bonuses seems to follow the opposite trend relative to stock options. As it seems that cash bonuses has

been a perfect substitute for stock options during the period before the introduction of IFRS 2, the



influence of IFRS 2 seems to be arguable. Consequently, IFRS 2 might not have triggered a substitution

from stock options to cash bonuses.

According to the coefficients table in Appendix XIV, the change in the cash bonus proportion increases

with share returns (RETit). As cash bonuses are performance related, well performing firms are granting

directors with a higher cash bonus. This results in a higher proportion of cash bonuses. As Chalmers et

al. (2006, p. 268) conclude that cash bonuses are related to both market and accounting performance,

this result is consistent regarding market performance. Additionally, the size of the board of directors

(BOA_SIZEit) is negatively related to the change in the proportion of cash bonus. This means that the

substitution is more diminished by a bigger board. As board size is a proxy for the complexity of firms, it

suggests that for more complex firms the decrease in stock option compensation is made up by other

forms of compensation than cash bonuses. The results for hypothesis 3 shows that more complex firms

substituted for stock options by an increased fixed salary. Following that more complex firms choose to

substitute for the decrease in proportion of stock option compensation by an increased proportion of

fixed salary, instead of cash bonuses. Note that the same determinants are significant in the opposite

direction compared to the results of substitution of fixed salary. According to the industry dummies, the

services industry has a significant negative relation to the change in proportion of cash bonuses.

As stated in Table 26 of Appendix XIV, size (LN_ASSETSit), growth opportunities (MTBit), risk (VOLit),

liquidity constraints (LIQ_CONit) and different industries have no significant influence on the change in

the proportion of cash bonuses. Size and growth opportunities seem to have no effect on the change in

proportion of cash bonuses. Together with risk, they are insignificant in all three substitution tests. The

insignificance of size indicates that companies’ substituting behavior is equal and that the effect of

expensing stock options is not dependent on size. As Chalmers et al. (2006, p. 268) shows, high growth

opportunity firms grant more share-based payment as they suffer from liquidity constraints. This might

explain the insignificance of both growth opportunities and liquidity constraints. As cash bonuses result

in cash outflows, liquidity constraint firms are assumed to already grant directors with a minimal

proportion of cash bonuses, and, therefore, may not grant directors an even lower proportion of cash

bonuses. Subsequently, stock option compensation is more pervasive in highly volatile firms (Chalmers

et al., 2006, pp. 268-269; Feng and Tian, 2007, p. 40). One means to mitigate volatility is to grant

directors with share-based payment, to align interest in to minimize risk. As the value of cash bonuses

are not dependent on share prices after they are granted, and thereby does not diminish risk on the long

term, it is efficient for highly volatile firms to make up stock option compensation with other share-



based payment. Note that size, growth opportunities, risk, and liquidity constraints are insignificant in all

three substitution models. This suggests that the impact of the decrease of stock option compensation

does not vary across firms, which are differing at any of these variables.

The multicollinearity diagnostics for this hypothesis are exactly the same compared to hypothesis 3, see

Table 27 in Appendix XIV for multicollinearity diagnostics for hypothesis 4. Therefore, it can be

concluded that although the natural logarithm of assets show a higher VIF-value than other independent

variables, multicollinearity is not a problem in all models.

6.4.3 Conclusion

The combined interpretation of descriptive statistics and the statistical results leads to the conclusion

that a decreasing proportion of stock options is substituted for by an increasing proportion of cash

bonuses. The changes in the proportion in the period 2002-2007 are not significantly different.

According to the results of hypothesis 1, the proportion of cash bonuses is a substitute for stock options,

but substitution is not triggered by the introduction of IFRS 2. Share returns are positively related to the

change in cash bonus. Consistent with Chalmers et al. (2006), cash bonus are related to the market

performance of a company. Jointly with the results on hypothesis 3, more complex firms seem to make

up an increase of stock options with a higher proportion of fixed salary. Size, growth opportunities, risk

and liquidity constraints turn out to be insignificant in all three substitution models. This suggest that

the impact of the expensing of stock options did not vary across different sized, risk, or liquidity

constrained companies. The insignificance of growth opportunities can also be explained by the

insignificance of liquidity constraints. While highly volatile companies want to mitigate risk, cash

bonuses do not provide a minimized risk in the long term. Last, liquidity constraints seems to have no

influence on the level of substitution, contrasting expectations. It seems that liquidity constrained firms

do not substitute cash bonuses more or less than other firms.



Chapter 7: Conclusion

Before 2005, Dutch-listed companies had to apply Dutch GAAP in annual statements. Under these

accounting standards, compensation forms were treated differently. Whilst fixed salary and cash

bonuses were expensed in the profit and loss account, shares were completely accounted for under

equity, and the intrinsic value of stock options, which was null in most cases, was also expensed. The

accounting treatments of shares and stock options made that the perceived costs of granting shares

consisted only from share dilution, and that stock options were more or less ‘free’. As share-based

payment is designed to tackle the principal-agent problem, and thereby minimizing agency costs, the

benefits of this type of compensation were even greater. The introduction of the International Financial

Reporting Standard 2, effective since 2005, had stopped the favorable treatment of shares and stock

options by adopting the fair value method. Accordingly, the fair value of both granted shares and stock

options had to be expensed in the profit and loss account.

In previous years, Article 383 in Book 2 of the Dutch Civil Code has required companies to disclose

amounts of remuneration of directors since 2002, and compliance with the Dutch Corporate

Governance Code, which has been mandatory since 2004, resulted in an exposure of corporate

remuneration practices. After several corporate scandals stock options were brought into disrepute.

Exposing to the public that companies granted directors with disreputable stock options is an incentive

to lower the amounts of granted stock options. Subsequently, the adoption of the ‘unfavorable’ fair

value method under IFRS 2 provides another incentive to firms to lower stock option grants.

Companies listed in the United States witnessed the same change in accounting standards regarding

stock options in 2005, whereas shares were recognized according to the fair value method during the

period before and after 2005. According to the studies of Feng and Tian (2007), Brown and Lee (2007),

Carter et al. (2007), and Choudhary (2008) the adoption of the fair value method has caused stock

option compensation to decrease in the United States. In addition, Brown and Lee (2007), Carter et al.

(2007), and Choudhary (2008) found that the decrease in stock options was substituted for by an

increase in share compensation. Swagerman and Terpstra (2009) found the same effect concerning

stock options and shares in the Netherlands in 2003 and 2004. They state that this substitution is caused

by companies preparing for IFRS 2 by altering compensation after the publication of the exposure draft



for IFRS 2. Additionally, the findings of Kraakman (2010) suggest that stock option compensation is

lowered, due to the adoption of IFRS 2 in the Netherlands.

Taking empirical literature and theory together, the decrease in stock option compensation is expected

to be substituted for by other forms of compensation. Following the theory, share compensation should

also be decreased. Consequently, four hypotheses are formed in order to test for the decrease of both

stock options and shares, and to test whether the hypothesized decrease of stock options is substituted

for by other compensation forms, namely fixed salary and cash bonuses. The four hypotheses and their

findings are:

H1: The proportion of the fair value of granted stock options to the board of directors of total

compensation has decreased after the mandatory adoption of IFRS for Dutch-listed companies.

The empirical findings for the first hypothesis in section 6.1 provide support that the fair value of stock

option compensation was declining, and that IFRS 2 was not the sole contributor. As the declining trend

has already started in 2004, the impact of the Dutch Corporate Governance Code, which compliance was

mandatory in the same year, may have also played a determinable role. The decline of stock option

compensation in 2005 and 2006 might be caused by the Code, and on the other side by IFRS 2.

H2: The proportion of the fair value of granted shares to the board of directors of total compensation has


For the second hypothesis the statistical results of the regression model indicate an increase in shares in

2004, and another increase in 2006, whereas the value of granted shares in 2005 and 2007 were at the

same value as the respective previous year. With the decline of stock options in the same years in mind,

the increase of shares seems to be a substitution for stock options. This surprising result demanded for a

deeper investigation into the substitution effect. In the additional test supporting evidence is found that

stock options are substituted for by shares in the compensation schemes of directors in 2004 and 2006.

The influence of IFRS 2 on substitution is arguable, because the decrease of stock options involves no

increase in shares in 2005, but in 2006. Whereas the 2004 substitution may be explained by the

introduction of the Code and companies preparing for IFRS 2, the substitution in 2006 cannot be

explained by neither IFRS 2 nor the Code. Additionally, the results indicate that the substitution is

completely independent of economic factors. Which in turn provides evidence that the substitution is

solely based on the decrease of stock options. To concise, the results provide evidence that shares can



be regarded as a substitute compensation alternative for stock options, although the influence of IFRS 2

is arguable.


granted stock options has caused an increase in the level of fixed salary to the board of directors.

From the results of the third hypothesis can be concluded that all years have no abnormal substitution

effect. The decrease in stock options in 2004 weakens the substitution effect for fixed salary, and

thereby suggesting that the cutback on stock options leads to an even lower proportion of fixed salary to

total compensation, and other forms of compensation (e.g. shares and cash bonuses) should made up.

Consequently, fixed salary is not regarded as a substitute for stock options.


granted stock options has caused an increase in the level of cash bonuses to the board of directors.

According to the findings on the fourth hypothesis, it turns out that cash bonuses are substitutes for

stock options. However, the change in the proportion of cash bonuses does not experience any

abnormal deviations. This indicates that stock options and cash bonuses have been substitutes since at

least 2002-2003. The introduction of IFRS 2 has not changed the substitution effect, and, therefore, it

can be concluded that IFRS 2 has not resulted in an accelerated substitution.

Combining the findings on the hypotheses leads to conclude that the decline in stock options was

caused by the combination of the Dutch Corporate Governance Code and the introduction of IFRS 2. The

regarded substitute compensation forms for stock options are both shares and cash bonuses. Whereas

the results on hypothesis 4 show that, although cash bonuses are a substitute, the introduction of IFRS 2

has not resulted in an abnormal substitution effect, the change in the proportion of shares significantly

differs from other years. This suggests that the decrease in stock option compensation is substituted for

by a small increase in cash bonuses and a major increase in shares. Although shares were considered as

much more efficient, stock option compensation was more prevalent due to the favorable accounting

treatment. However, the economic costs of stock options were higher than that for shares. By disposing

the favorable accounting treatment, the perceived costs of both shares and stock options were aligned

with the economic costs, causing a shift from stock options to shares. In addition, the decrease of stock

options is more likely to be substituted for by cash bonuses in firms with high market performance and

less likely in complex firms. Also the Dutch Corporate Governance Code contributed to the increasing

costs of stock options. The Code required the inclusion of a vesting period for stock options, which



diminished the perceived value of stock options for directors, since they could only exercise it after the

vesting period was over. This leads to conclude that the Code and the introduction of IFRS 2 has caused

a substitution from stock options compensation to share compensation in the remuneration of directors

of companies listed at the Dutch stock exchange market. Accounting standards can be regarded as

decisive in the decision-making behavior of managers. Specifically, this thesis shows that a change in

accounting standards contributes to the change in decisions about remuneration practices of Dutch

companies.



Chapter 8: Limitations and future research

Although the research in this thesis is empirical, this is not without limitations. In this chapter, these

limitations of the research in this thesis are discussed. In the next section several suggestions for future

research are made.

8.1 Limitations

A first limitation that arises is the legal status of the RJ-guidelines in the Netherlands. As companies

were not legally committed to apply the guidelines of the RJ before 2005, but to apply guidelines that

were considered fair in Dutch society, companies might not applied RJ-guidelines to their fullest in the

sample period 2002-2005. However, the RJ-guidelines are considered to direct to what acceptable

guidelines in Dutch society are. Consequently, most companies apply the guidelines as developed by the

RJ. For the sample period 2005-2007, there are no limitations regarding the legal character of IFRS, as

the full adoption of IFRS was mandatory.

Second, missing data about the share price at grant date was replaced by the share price at year-end. As

the share price at grant date and at year-end may differ, the fair value of granted shares and stock

options might be different from the actual fair value. This also leads to the third limitation.

The fair value of stock options is calculated according to the Black-Scholes model. Although the Black-

Scholes model meets the criteria for an option pricing model, the calculated fair value might differ from

the fair value in the directors’ perception or the actual fair value. As Brown and Szimayer (2008) argue

that performance hurdles and stochastic volatility included in stock options for executives are actually

lowering the fair value of stock options, the calculated fair value is too high. Additionally, Huddart (1994,

pp. 223-224) shows that the vesting conditions involved in granted stock options also reduce the fair

value.

The fourth limitation arises from the sample size. For hypotheses 1, 3 and 4 the sample size consisted of

34 firms, each with 6 firm years for hypothesis 1 and 5 firm years for hypotheses 3 and 4. For hypothesis

2, the sample yielded 29 firms and 6 firm years each. Accordingly, the sample sizes may be too small to

make strong conclusions beyond the used samples.

The explanatory variables used in the regression models are proxies for several factors. One limitation is

that those proxies do not represent the factor. For example, board size is considered as a proxy for the



complexity of a company, but it may be that less complex companies have a relatively large board.

Additionally, the regression models control for a firm’s market performance, whereas the firm’s

accounting performance may predict the dependent variable.

Another limitation is that the impact of Article 383c, the Dutch Corporate Governance Code, and the

introduction of IFRS 2 is indicated by year dummies. They all lack a causal relation with the change in

remuneration practices.

Finally, the seventh limitation involves the endogeneity problem. While in the regression models several

variables are included that should predict the outcome, there may be other, not included variables that

are determinable for the value of the dependent variable. Some factors, that are not considered, might

be the influence of tax regimes, preferences of directors or remuneration committees, or, consistent

with the fifth limitation, a firm’s accounting performance.

8.2 Future research

The research in this thesis tries to illustrate what the economic consequences of the introduction of IFRS

2 are. The results provide support that IFRS 2, in combination with the Dutch Corporate Governance

Code, has caused a change in the remuneration practices of Dutch-listed companies. It may be

interesting to investigate the perceptions of executives regarding remuneration and how the adoption

of the fair value method has altered those perceptions. Although this topic belongs more to the field of

management accounting, this may provide a large contribution to the study on economic consequences

of IFRS 2.

Alternatively, the effectiveness of several forms of compensation may be investigated to provide an

understanding in how well remuneration works and to find an answer if shares are really more efficient

than stock options in a management perspective as well as in shareholders’ perspective.

Third, this study focuses only on the change in remuneration in the Netherlands. As compliance with

IFRS 2 was mandatory for all European listed companies, this new standard may have affected

remuneration practices in other countries as well. A comparison among the consequences of IFRS 2 in

different countries also contributes to the understanding of IFRS 2’s economic consequences.



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Based Compensation. Journal of Accounting Research 34: 1-20.

Deshmukh, S., K.M. Howe and C. Luft. 2006. Executive Stock Options: To Expense or Not? Financial

Management 35 (Spring): 87-106.

Ernst & Young. 2004. International Financial Reporting Standards: Vergelijking met Nederlandse wet- en

regelgeving. Fifth edition. Rotterdam, The Netherlands: Directoraat Vaktechniek.

Farber, D.B., M.F. Johnson, and K.R. Petroni. 2007. Congressional Intervention in the Standard-Setting

Process: An Analysis of the Stock Option Accounting Reform Act of 2004. Accounting Horizons 21

(1): 1-22.

Feng, Y., and Y.S. Tian. 2007. Option Expensing and Executive Compensation. Working paper, York

University, Toronto, Ontario, Canada.

Field, A. 2005. Discovering Statistics Using SPSS. 2nd edition. London, England: SAGE Publications.



Frederickson, J.R., F.D. Hodge, and J.H. Pratt. 2006. The Evolution of Stock Option Accounting:

Disclosure, Voluntary Recognition, Mandated Recognition, and Management Disavowals. The

Accounting Review 81 (5): 1073-1093.

Guay, W., S.P. Kothari, and R. Sloan. 2003. Accounting for Employee Stock Options. The American

Economic Review 93(2): 405-409.

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Economics 33: 3-42.

Hall, B.J., and K.J. Murphy. 2003. The Trouble with Stock Options. Journal of Economic Perspectives

17(3): 49-70.

Huddart, S. 1994. Employee stock options. Journal of Accounting and Economics 18: 207-231.

Hull, J., and A. White. 2004. How to Value Employee Stock Options. Financial Analysts Journal 60 (1):

114-119.

International Accounting Standards Board (IASB). 2009. International Financial Reporting Standard 2:

Share-based Payment.

Jensen, M.C., and K.J. Murphy. 1990. Performance pay and top-management incentives. The Journal of

Political Economy 98(2): 225-264.

Jong, A. de, D.V. DeJong, G. Mertens, and C.E. Wasley. 2005. The role of self-regulation in corporate

governance: evidence and implications from The Netherlands. Journal of Corporate Finance 11:

473-503.

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Compensation Contracts. The Review of Financial Studies 21(1): 451-482.

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ESOs and their use?: Economic consequences of IFRS 2 in The Netherlands. Master’s Thesis,

Erasmus University, Rotterdam, The Netherlands.



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Exercises In Valuation Of Employee Stock Options. Mathematical Finance 19 (1): 99-128.

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Appendix I: Black-Scholes formula

The value of an European call option C(S) according to the Black-Scholes formula is:

C(S) = Sx N(d1) – PV (K) N(d2)

Where:

Sx = S (e−qT )

S = share price

q = dividend yield

T = time to expiration date

N(d1) = the cumulative normal distribution of d1

d1 = ln [S x /PV (K )]

(σ √T )+

(σ √T )2

N(d2) = the cumulative normal distribution of d2

d2 = d1 - σ √T

PV (K) = exercise price (e−rT)

r = risk-free interest rate

σ = stock volatility



Appendix II: Summarizing table of prior empirical literature

Authors Object of study Sample Methodology Outcome4.1 Impacting accounting numbersA.P. Sweeney (1994) Accounting changes and the

violation of accounting-based covenants.

130 U.S. firms consisting of first-time violators in the period 1980-1989.

Cross-sectional regression, Chi-square tests and case analysis

A direct link between accounting changes and closeness to debt-covenant constraints and the responses of managers.

P.M. Dechow, A.P. Hutton and R.G. Sloan (1996)

Characteristics of firms lobbying against fair value method and of firms using ESOs. Stock price reaction to new standard.

All firms in Compustat files for the fiscal year 1992 in the U.S.

Multiple regression Investors did not react to mandatory expensing of ESOs.

K. Chalmers and J.M. Godfrey (2005)

Impact of IFRS 2 on financial performance ratios.

159 Australian companies that granted ESOs in 2002

Median tests and Kruskal-Wallis tests

IFRS 2 has a significant impact on accounting numbers.

C. Viger, R. Belzile and A.A. Anandarajan (2008)

The effect of different accounting methods of ESOs on the decisions of bank loan officers.

144 Canadian bank loan officers in March 2004

Experiment with overall MANOVA test

When ESO expense was recognized bank loan officers estimated higher risk and were less likely to grant the loan relative to firms with disclosed ESO expense

D. Robinson and D. Burton (2004)

The market reaction to announcement by firms to adopt the fair value method and the impact on profitability measures of ESO expensing.

97 U.S. firms that announced the adoption of the fair value method before September 13, 2002.

Multiple regression Adoption announcements are viewed as a credible signal of reporting quality and the impact on profitability measures is lower for early adopters.

J. Cotter and I. Zimmer (2003)

The value relevance of recognized and disclosed items.

112 Australian companies in the period 1987-1989

Probit and pooled regressions

Recognized items are seen as more reliable amounts compared to disclosed items.

J.R. Frederickson, F.D. Hodge and J.H. Pratt (2006)

User assessments of reliability of recognition and disclosures.

220 randomly selected individuals of a participation pool

Experiment with ANOVA and ANCOVA test

Users invest more in firms that chose for recognition than firms that chose for disclosure of ESOs.



S. Deshmukh, K.M. Howe and C. Luft (2006)

The role of the agency theory and asymmetric information theory in the decision to expense ESOs.

207 U.S. firms that voluntarily announced to adopt the fair value method between January 2002 and December 2003.

Logit analyses Firms with low agency costs and with greater transparency are more likely to expense ESOs.

4.2 US-based studiesY. Feng and Y.S. Tian (2007)

The impact of mandatory ESO expensing on executive compensation.

1,609 firms with information available in ExecuComp, CRSP, and Compustat in 1993-2005.

Multiple regression The decline of stock option compensation is mainly caused by ESO expense becoming mandatory

L.D. Brown and Y. Lee (2007)

The determinants and consequences of the changes in stock option compensation.

1,022 firms with compensation data from 2005 in ExecuComp.

Multiple regression Due to the mandatory expensing of ESOs, firms reduced stock option compensation, and increased restricted stock compensation

M.E. Carter, L.J. Lynch and I. Tuna (2007)

The role of accounting on executive compensation design.

6,242 firms with ExecuComp information in 1995-2001.

Multiple regression Favorable accounting treatment of stock options led to a higher use of stock option compensation.

P. Choudhary (2008) The effect of recognition or disclosure of fair value of share-based payment on the amount and structure of stock options and restricted stock.

795 mandatory disclosure firms, 783 mandatory recognition firms, and 127 voluntary recognition firms as control group.

Multiple regression Managers and governing boards treat recognition and disclosure differently. During fair value recognition firms substituted stock option compensation with restricted stock compensation.

4.3 Netherlands-based studiesD. Swagerman and E. Terpstra (2009)

The trend of executive compensation packages in Dutch listed firms.

71 Dutch listed firms for the period 2002-2004.

Quantitative research

The Dutch Corporate Governance Code, IFRS 2 and investor pressure has led to revised incentive plans. Dutch compensation packages are becoming more effective.Performance share plans have replaced stock options.



L. Kraakman (2010) The impact of IFRS 2 on stock option compensation in The Netherlands.

41 Dutch listed firms for the period 2002-2007.

Multiple regression The introduction of IFRS 2 has caused a significant decline in stock option compensation.

4.4 Determinants for remunerationK. Chalmers, P. Koh and G. Stapledon (2006)

The determinants of several forms of CEO compensation in Australia.

532 firm years from the top 200 Australian listed firms for the period 1999-2002.

Multiple regression The amounts of fixed salary, bonuses, stock options and shares have differential determinants. Besides economic determinants, governance and ownership attributes have an influence on compensation.

K.J. Murphy (1998) Pay practices for CEOs. S&P 500 firms for 1992-1996. Quantitative research

Size is positively related to the amount of CEO compensationEngaging in riskier investments may be caused by stock option grantsPay levels are dependent on industries

J.E. Core and W.R. Guay (2001)

Determinants for stock option compensation for non-executive employees.

756 firms from the ExecuComp database for the period 1994-1997.

Multiple regression Firms with financial constraints use relatively more stock options.

S. Bryan, L. Hwang and S. Lilien (2000)

Their research focuses on the determinants and incentives for stock option compensation and restricted stock compensation.

Over 1,700 firms from the ExecuComp database over 1992-1997.

Tobit model Determinants for stock option awards include proxies for agency costs and financial constraints. Growth opportunity firms make relatively less use of restricted stock, because stock options are considered as more efficient.



D. Yermack (1995) Several determinants for stock option compensation are identified, namely tax, liquidity, earnings management.

792 U.S. firms for the period 1984-1991.

Tobit model Liquidity constraint firms grant relatively more stock options to CEOs.The level of pay is different across industries.Ownership does not explain stock option compensation.

O. Kadan and J.M. Swinkels (2008)

They investigate what motivates firms to choose for stock options or shares as compensation.

14,478 firm years from the ExecuComp database over the period 1992-2004.

Logistic regression Default risky firms make relatively more use of shares. When emerged from bankruptcy they switch to stock options.



Appendix III: Thomson One Banker definitions

Calculation Definition Thomson One BankerLn(Total Assets) Total Assets

Industrials

Total assets represent the sum of total current assets, long term receivables, investment in unconsolidated subsidiaries, other investments, net property plant and equipment and other assets.

Banks:

Total assets represent the sum of cash & due from banks, total investments, net loans, customer liability on acceptances, investment in unconsolidated subsidiaries, real estate assets, net property, plant and equipment and other assets.

Insurance companies:

Total assets represent the sum of cash, total investments, premium balance receivables, investments in unconsolidated subsidiaries, net property, plant and equipment and other assets.

Other financial companies:

Total assets represent the sum of cash & equivalents, receivables, securities inventory, custody securities, total investments, net loans, net property, plant and equipment, investments in unconsolidated subsidiaries and other assets.

Market To Book Ratio = Year End Market Capitalization / (Total Assets - Total Liabilities)

Year End Market Capitalization= market price-year end * common shares outstanding

Total AssetsAs above

Total LiabilitiesTotal liabilities represent all short and long term obligations expected to be satisfied by the company. It includes:



1. Current Liabilities2. Long Term Debt 3. Provision for Risk and Charges (non-U.S. corporations) 4. Deferred taxes 5. Deferred income 6. Other liabilities 7. Deferred tax liability in untaxed reserves (non-U.S.

corporations) 8. Unrealized gain/loss on marketable securities (insurance

companies) 9. Pension/Post retirement benefits 10. Securities purchased under resale agreements (banks)

It excludes:

1. Minority Interest 2. Preferred stock equity 3. Common stock equity 4. Non-Equity reserves

Past stock returns measured by total investment return

Total Investment Return= (market price year end + dividends per share + special dividend quarter 1 + special dividend quarter 2 + special dividend quarter 3 + special dividend quarter 4) / last year's market price-year end - 1) *100

Share Price Volatility Share Price Volatility= measure of a stock's average annual price movement to a high and low from a mean price for each year. For example, a stock's price volatility of 20% indicates that the stock's annual high and low price has shown a historical variation of +20% to -20% from its annual average price.

The three year average of (common + preferred dividends + cash flow used in investing activities – cash flow generated from operations) / total assets = [( -(Free Cash Flowt-2) / Total assetst-2) + ( -(Free Cash Flowt-1) / Total assetst-1) + ( -(Free Cash Flowt) / Total assetst)] / 3

Free Cash Flow= net operating cash flow – cash dividends – capital expenditures cash flowTotal AssetsAs above



Dummy variables for each industry according to primary SIC.

They are derived from the 1987 edition of the Standard Industrial Classification Manual compiled by the Executive Office of the President of the United States, Office of Management and Budget. These SIC codes are assigned to both U.S. and non-U.S. companies according to the type of business in which they are engaged. If a sales breakdown is not available the SIC Code is assigned according to the best judgment of Worldscope.

The only control variable that has not been retrieved from Thomson One Banker, but hand-picked from the annual reports is board size. It is measured by the average amount of members in the board of management during the reporting period.



Appendix IV: List of primary SIC codes

Primary SIC code Industry0100-0999 Agriculture, Forestry, and Fishing1000-1499 Mining1500-1799 Construction2000-3999 Manufacturing4000-4999 Transportation, Communications, Electric, Gas, and Sanitary Services5000-5199 Wholesale Trade5200-5999 Retail Trade6000-6799 Finance, Insurance, and Real Estate7000-8999 Services9100-9899 Public Administration9999 Nonclassifiable Establishments

As available on: http://www.gti.net/njchamber/index-sic.htm


http://www.gti.net/njchamber/index-sic.htm


Appendix V: Descriptive statistics on hypothesis 1

Industry Frequency PercentageAgriculture, Forestry, and Fishing 0 0.00 %Mining 1 2.94 %Construction 1 2.94 %Manufacturing 13 38.24 %Transportation, Communications, Electric, Gas, and Sanitary Services

2 5.88 %

Wholesale Trade 2 5.88 %Retail Trade 3 8.82 %Finance, Insurance, and Real Estate 4 11.77 %Services 8 23.53 %Public Administration 0 0.00 %Nonclassifiable Establishments 0 0.00 %Total 34 100.00 %Table 1: Classification of companies

StatisticsPR_FV_STO_EXCL_MCL_COM

N Valid 204

Missing 0Mean ,139284Std. Deviation ,1571665Minimum ,0000Maximum ,6743

Table 2: SPSS output on descriptive statistics



Figure 1: SPSS histogram of distribution of the proportion of stock options

2002 2003 2004 2005 2006 20070

0.020.040.060.08

0.10.120.140.160.18

0.2

Trend of proportion of granted stock options to total compensation

Figure 2: Trend of proportion of granted stock options to total compensation



Appendix VI: Statistical findings on hypothesis 1

Model Summary

Model R R SquareAdjusted R

SquareStd. Error of the

Estimate

1 ,375 ,141 ,056 ,1532702PR_FV_STOit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6 LN_ASSETSit

+ β7 MTBit + β8 RETit + β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑ IND_DUMMit + ɛit

Table 3: Summary of SPSS model

ANOVA

Model Sum of Squares df Mean Square F Sig.

1 Regression ,699 18 ,039 1,654 ,051*

Residual 4,276 182 ,023

Total 4,975 200*,**,*** significant at the 0.1, 0.05 and 0.01 levels.

PR_FV_STOit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6 LN_ASSETSit + β7

MTBit + β8 RETit + β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑ IND_DUMMit + ɛit

Table 4: SPSS analysis of variance

Robbert Hooijmeijer | July, 201110

0


Coefficientsa

ModelUnstandardized Coefficients

Standardized Coefficients

t Sig.Sig. 1-tailedB Std. Error Beta

1 (Constant) -,039 ,129 -,305 ,760 ,380

D_2003 -,003 ,042 -,007 -,071 ,944 ,472

D_2004 -,072 ,042 -,171 -1,688 ,093 ,047**

D_2005 -,098 ,046 -,234 -2,127 ,035 ,018**

D_2006 -,095 ,043 -,226 -2,184 ,030 ,015**

D_2007 -,049 ,039 -,115 -1,237 ,218 ,109

LN_ASSETS ,013 ,009 ,168 1,404 ,162 ,081*

MTB ,010 ,007 ,122 1,427 ,155 ,078*

RET ,000 ,000 ,067 ,701 ,484 ,242

VOL -1,230E-5 ,001 -,001 -,009 ,993 ,497

BOA_SIZE ,006 ,010 ,055 ,559 ,577 ,289

LIQ_CON ,155 ,150 ,088 1,033 ,303 ,152

IND_D_MINING -,014 ,074 -,015 -,184 ,854 ,427

IND_D_CONSTR -,056 ,068 -,061 -,825 ,411 ,206

IND_D_TRANS_COMM_ELE_GAS_SAN_SERV

-,047 ,051 -,070 -,909 ,365 ,183

IND_D_WHOLESALE -,050 ,049 -,076 -1,022 ,308 ,154

IND_D_RETAIL ,012 ,042 ,022 ,287 ,775 ,388

IND_D_FIN_INS_REAL_EST

-,080 ,043 -,155 -1,830 ,069 ,035**

IND_D_SERVICES ,063 ,034 ,171 1,879 ,062 ,031**

*,**,*** significant at the 0.1, 0.05 and 0.01 levels (one-tailed).a. Dependent Variable: PR_FV_STO_EXCL_MCL_COM

Table 5: SPSS model parameters


1


Model Collinearity Statistics

Tolerance VIF

1 (Constant)

D_2003 ,479 2,087

D_2004 ,462 2,166

D_2005 ,392 2,554

D_2006 ,441 2,266

D_2007 ,549 1,821

LN_ASSETS ,330 3,031

MTB ,643 1,556

RET ,510 1,961

VOL ,643 1,555

BOA_SIZE ,495 2,021

LIQ_CON ,648 1,542

IND_D_MINING ,736 1,358

IND_D_CONSTR ,870 1,150


,791 1,264

IND_D_WHOLESALE ,861 1,162

IND_D_RETAIL ,816 1,226


,661 1,513

IND_D_SERVICES ,568 1,762Table 6: Collinearity diagnostics for hypothesis 1


2


Appendix VII: Descriptive statistics on hypothesis 2

Industry Frequency PercentageAgriculture, Forestry, and Fishing 0 0.00 %Mining 1 3.45 %Construction 1 3.45 %Manufacturing 11 37.93 %Transportation, Communications, Electric, Gas, and Sanitary Services

2 6.90 %

Wholesale Trade 3 10.34 %Retail Trade 1 3.45 %Finance, Insurance, and Real Estate 4 13.79 %Services 6 20.69 %Public Administration 0 0.00 %Nonclassifiable Establishments 0 0.00 %Total 29 100.00 %Table 7: Classification of companies

StatisticsPR_SHA_EXCL_MCL_COM

N Valid 174

Missing 0Mean ,162794Std. Deviation ,1791073Minimum ,0000Maximum ,6988



3


Figure 3: SPSS histogram of distribution of the proportion of shares

Figure 4: Trend of proportion of granted shares to total compensation


4

2002 2003 2004 2005 2006 20070

0.05

0.1

0.15

0.2

0.25

0.3

Trend of proportion of granted shares to total compensation


Appendix VIII: Statistical findings on hypothesis 2

Model Summary



Estimate

1 ,603 ,364 ,288 ,1517601PR_FV_SHAit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6

LN_ASSETSit + β7 MTBit + β8 RETit + β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑

IND_DUMMit + ɛit


ANOVA


1 Regression 1,990 18 ,111 4,801 ,000***

Residual 3,478 151 ,023

Total 5,468 169*,**,*** significant at the 0.1, 0.05 and 0.01 levels.

PR_FV_SHAit = β0 + β1 2003 + β2 2004 + β3 2005 + β4 2006 + β5 2007 + β6 LN_ASSETSit + β7

MTBit + β8 RETit + β9 VOLit + β10 BOA_SIZEit + β11 LIQ_CONit + ∑ IND_DUMMit + ɛit



5


Coefficientsa




1 (Constant) ,090 ,156 ,579 ,563 ,282

D_2003 ,003 ,046 ,005 ,058 ,954 ,477

D_2004 ,093 ,044 ,194 2,089 ,038 ,019**

D_2005 ,094 ,048 ,196 1,944 ,054 ,027**

D_2006 ,170 ,047 ,357 3,635 ,000 ,000***

D_2007 ,180 ,042 ,372 4,237 ,000 ,000***

LN_ASSETS ,002 ,010 ,026 ,233 ,816 ,408

MTB ,011 ,008 ,118 1,377 ,171 ,086*

RET 8,065E-5 ,000 ,018 ,198 ,844 ,422

VOL ,002 ,001 ,093 1,112 ,268 ,134

BOA_SIZE -,023 ,012 -,178 -1,927 ,056 ,028**

LIQ_CON ,237 ,178 ,119 1,331 ,185 ,093*

IND_D_MINING ,132 ,076 ,135 1,738 ,084 ,042**

IND_D_CONSTR -,106 ,067 -,109 -1,592 ,113 ,057*


-,100 ,051 -,143 -1,968 ,051 ,026**

IND_D_WHOLESALE ,041 ,045 ,071 ,930 ,354 ,177

IND_D_RETAIL -,100 ,069 -,103 -1,442 ,151 ,076*


-,158 ,044 -,291 -3,561 ,000 ,000***

IND_D_SERVICES -,068 ,040 -,153 -1,697 ,092 ,046**

*,**,*** significant at the 0.1, 0.05 and 0.01 levels (one-tailed).a. Dependent Variable: PR_FV_SHA_EXCL_MCL_COM



6



Tolerance VIF

1 (Constant)

D_2003 ,472 2,117

D_2004 ,488 2,051

D_2005 ,413 2,423

D_2006 ,437 2,287

D_2007 ,546 1,831


MTB ,574 1,743

RET ,519 1,927

VOL ,603 1,659

BOA_SIZE ,492 2,035

LIQ_CON ,529 1,889




,800 1,250




,633 1,581



7


Appendix IX: Descriptive statistics on substitution test hypothesis 2

Statistics

PR_FV_SHA_EXCL_MCL_CO

M

Delta_PR_FV_SHA_EXCL_MC

L

N Valid 145 145

Missing 0 0Mean ,183042 3,728917Std. Deviation ,1809188 14,0922954Minimum ,0000 -52,3976Maximum ,6988 55,8186



8


Figure 5: SPSS histogram of distribution of the change in the proportion of shares

2002 2003 2004 2005 2006 20070

0.05

0.1

0.15

0.2

0.25

0.3

PR_FV_SHA PR_FV_STO_EXCL_MCL_COM

Figure 6: Trend of proportion of granted stock options and shares

2003 2004 2005 2006 2007

-8

-6

-4

-2

0

2

4

6

8

10

Delta_PR_FV_SHA Delta_PR_FV_STO

Figure 7: Trend of the change in the proportion of granted stock options and shares


9


Appendix X: Statistical findings on substitution test hypothesis 2

Model Summary



Estimate

1 ,407 ,165 ,044 13,8647984Δ PR_FV_SHAit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007

+ α6 LN_ASSETSit + α7 MTBit + α8 RETit + α9 VOLit + α10 BOA_SIZEit + α11 LIQ_CONit +

∑ IND_DUMMit + ɛit


ANOVA


1 Regression 4719,364 18 262,187 1,364 ,162

Residual 23836,847 124 192,233

Total 28556,210 142

Δ PR_FV_SHAit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6

LN_ASSETSit + α7 MTBit + α8 RETit + α9 VOLit + α10 BOA_SIZEit + α11 LIQ_CONit + ∑ IND_DUMMit + ɛit



0


Coefficientsa




1 (Constant) 1,852 16,230 ,114 ,909 ,455

Delta_PR_FV_STO_EXCL_MCL

-,283 ,102 -,243 -2,784 ,006 ,003***

D_2004 5,932 3,702 ,169 1,603 ,112 ,056*

D_2005 -,225 3,771 -,006 -,060 ,953 ,477

D_2006 6,611 3,823 ,188 1,729 ,086 ,043**

D_2007 -,345 4,005 -,010 -,086 ,931 ,466

LN_ASSETS -,171 1,021 -,024 -,168 ,867 ,434

MTB -,283 ,811 -,038 -,349 ,727 ,364

RET ,023 ,040 ,061 ,581 ,563 ,282

VOL -,005 ,150 -,004 -,037 ,971 ,486

BOA_SIZE ,519 1,190 ,050 ,436 ,663 ,332

LIQ_CON -5,042 17,474 -,032 -,289 ,773 ,387

IND_D_MINING 3,347 7,538 ,044 ,444 ,658 ,329

IND_D_CONSTR -13,851 6,680 -,180 -2,074 ,040 ,020**


,014 5,097 ,000 ,003 ,998 ,499

IND_D_WHOLESALE -,259 4,454 -,006 -,058 ,954 ,477

IND_D_RETAIL -1,158 6,931 -,015 -,167 ,868 ,434


-1,418 4,342 -,033 -,327 ,745 ,373

IND_D_SERVICES 1,978 4,014 ,057 ,493 ,623 ,312

*,**,*** significant at the 0.1, 0.05 and 0.01 levels (one-tailed).a. Dependent Variable: Delta_PR_FV_SHA_EXCL_MCL



1



Tolerance VIF

1 (Constant)


,900 1,112

D_2004 ,746 1,340

D_2005 ,667 1,498

D_2006 ,679 1,472

D_2007 ,739 1,353


MTB ,570 1,754

RET ,638 1,568

VOL ,602 1,661

BOA_SIZE ,476 2,103

LIQ_CON ,529 1,889




,799 1,252




,634 1,578

IND_D_SERVICES ,517 1,936Table 17: Collinearity diagnostics for substitution effect of hypothesis 2


2


Appendix XI: Descriptive statistics on hypothesis 3

Statistics

PR_FIX_SAL_EXCL_MCL

Delta_PR_FIX_SAL_EXCL_MC

L

N Valid 170 170

Missing 0 0Mean ,483965 -3,6589529Std. Deviation ,1616853 14,46210168Minimum ,1888 -47,90725Maximum ,8815 43,11852


Figure 8: SPSS histogram of distribution of the proportion of fixed salary


3


Figure 9: SPSS histogram of distribution of the change in the proportion of fixed salary

2002 2003 2004 2005 2006 20070

0.1

0.2

0.3

0.4

0.5

0.6

0.7

PR_FIX_SAL_EXCL_MCL PR_FV_STO_EXCL_MCL


4


Figure 10: Trend of proportion of granted stock options and fixed salary

2003 2004 2005 2006 2007

-8

-6

-4

-2

0

2

4

DELTA_PR_FIX_SAL_EXCL_MCL DELTA_PR_FV_STO_EXCL_MCL

Figure 11: Trend of the change in the proportion of granted stock options and fixed salary


5


Appendix XII: Statistical findings on hypothesis 3

Model Summary



Estimate

1 ,609 ,371 ,295 12,20713537Δ PR_FIX_SALit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 +

α6 LN_ASSETSit + α7 MTBit + α8 RETit + α9 VOLit + α10 BOA_SIZEit + α11 LIQ_CONit + ∑

IND_DUMMit + ɛit


ANOVA


1 Regression 13075,748 18 726,430 4,875 ,000***

Residual 22203,109 149 149,014

Total 35278,857 167

*,**,*** significant at the 0.1, 0.05 and 0.01 levels.Δ PR_FIX_SALit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6




6


Coefficientsa



t Sig.Sig. 1-tailedA Std. Error Alpha

1 (Constant) 10,445 11,898 ,878 ,381 ,191


-,523 ,064 -,567 -8,132 ,000 ,000***

D_2004 -5,927 3,036 -,164 -1,952 ,053 ,027**

D_2005 ,753 3,127 ,021 ,241 ,810 ,405

D_2006 -2,698 3,136 -,075 -,860 ,391 ,196

D_2007 -1,566 3,232 -,043 -,485 ,629 ,315

LN_ASSETS -,784 ,805 -,111 -,974 ,332 ,166

MTB -,395 ,594 -,054 -,664 ,508 ,254

RET -,054 ,029 -,154 -1,833 ,069 ,035**

VOL -,131 ,124 -,088 -1,052 ,294 ,147

BOA_SIZE 1,528 ,916 ,151 1,668 ,097 ,049**

LIQ_CON 11,521 13,162 ,070 ,875 ,383 ,192

IND_D_MINING -3,969 6,449 -,047 -,615 ,539 ,270

IND_D_CONSTR -,055 6,035 -,001 -,009 ,993 ,497


3,617 4,484 ,059 ,807 ,421 ,211

IND_D_WHOLESALE -2,046 4,318 -,033 -,474 ,636 ,318

IND_D_RETAIL ,444 3,712 ,009 ,120 ,905 ,453


-1,726 3,721 -,037 -,464 ,643 ,322

IND_D_SERVICES 2,673 2,937 ,079 ,910 ,364 ,182

*,**,*** significant at the 0.1, 0.05 and 0.01 levels (one-tailed).a. Dependent Variable: Delta_PR_FIX_SAL_EXCL_MCL



7



Tolerance VIF

1 (Constant)


,882 1,134

D_2004 ,702 1,425

D_2005 ,628 1,592

D_2006 ,670 1,492

D_2007 ,741 1,349


MTB ,639 1,565

RET ,625 1,600

VOL ,643 1,554

BOA_SIZE ,490 2,042

LIQ_CON ,648 1,543




,790 1,265




,660 1,516



8


Appendix XIII: Descriptive statistics on hypothesis 4

Statistics

PR_CSH_BON_EXCL_MCL

Delta_PR_CSH_BON_EXCL_

MCL

N Valid 170 170

Missing 0 0Mean ,243337 ,999138Std. Deviation ,1163288 11,2603609Minimum ,0000 -32,8272Maximum ,6291 30,1070


Figure 12: SPSS histogram of distribution of the proportion of cash bonuses


9


Figure 13: SPSS histogram of distribution of the change in the proportion of cash bonuses

2002 2003 2004 2005 2006 20070

0.05

0.1

0.15

0.2

0.25

0.3

PR_CSH_BON_EXCL_MCL PR_FV_STO_EXCL_MCL

Figure 14: Trend of proportion of granted stock options and cash bonuses


0


2003 2004 2005 2006 2007

-8

-6

-4

-2

0

2

4

6

DELTA_PR_CSH_BON_EXCL_MCL DELTA_PR_FV_STO_EXCL_MCL

Figure 15: Trend of the change in the proportion of granted stock options and cash bonuses


1


Appendix XIV: Statistical findings on hypothesis 4

ModelR R Square

Adjusted R Square Std. Error of the Estimate

1 ,546a ,298 ,229 9,0915614Δ PR_CSH_BONit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 +

α6 LN_ASSETSit + α7 MTBit + α8 RETit + α9 VOLit + α10 BOA_SIZEit + α11 LIQ_CONit + ∑

IND_DUMMit + ɛit


ANOVA


1 Regression 6398,705 18 355,484 4,301 ,000***

Residual 15043,481 182 82,656

Total 21442,186 200*,**,*** significant at the 0.1, 0.05 and 0.01 levels.Δ PR_CSH_BONit = α0 + α1 Δ PR_FV_STOit + α2 2004 + α3 2005 + α4 2006 + α5 2007 + α6




2


Coefficientsa

Model Unstandardized Coefficients



1 (Constant) -3,439 7,691 -,447 ,655 ,328


-,335 ,048 -,465 -7,032 ,000 ,000***

D_2004 1,678 2,042 ,061 ,822 ,412 ,206

D_2005 ,333 2,159 ,012 ,154 ,878 ,439

D_2006 -1,623 2,090 -,059 -,777 ,438 ,219

D_2007 2,269 2,010 ,081 1,128 ,261 ,131

LN_ASSETS ,278 ,541 ,056 ,513 ,608 ,304

MTB ,410 ,410 ,078 1,000 ,319 ,160

RET ,029 ,018 ,124 1,578 ,116 ,058*

VOL ,099 ,080 ,095 1,227 ,221 ,111

BOA_SIZE -1,428 ,624 -,203 -2,288 ,023 ,012**

LIQ_CON -4,524 8,899 -,039 -,508 ,612 ,306

IND_D_MINING 1,022 4,390 ,017 ,233 ,816 ,408

IND_D_CONSTR 2,062 4,048 ,034 ,509 ,611 ,306


-2,629 3,044 -,060 -,864 ,389 ,195

IND_D_WHOLESALE -,533 2,923 -,012 -,182 ,855 ,428

IND_D_RETAIL 1,429 2,488 ,040 ,574 ,566 ,283


3,128 2,581 ,093 1,212 ,227 ,114

IND_D_SERVICES -2,758 1,996 -,114 -1,382 ,169 ,085*

*,**,*** significant at the 0.1, 0.05 and 0.01 levels (one-tailed).a. Dependent Variable: Delta_PR_CSH_BON_EXCL_MCL



3



Tolerance VIF

1 (Constant)


,882 1,134

D_2004 ,702 1,425

D_2005 ,628 1,592

D_2006 ,670 1,492

D_2007 ,741 1,349


MTB ,639 1,565

RET ,625 1,600

VOL ,643 1,554

BOA_SIZE ,490 2,042

LIQ_CON ,648 1,543




,790 1,265




,660 1,516



4

1.1 research question · web view4.3.1 swagerman and terpstra (2009) swagerman and terpstra (2009)...

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