Employee Stock Options, Political Connections and Regulation Change in Chinese Listed Firms

Motivated by the institutional setting and based on the extant literature, this paper investigates the effects of changes in the regulation of employee stock options (SO) and political connection (PC) on SO grants (size-SOP and value-SOM) and the moderating effects of changes in ESO regulations on the relationship between political connections and SO grants. Using the established measurements of stock option grants, political connection and stock option regulation change (REG), we analysed the final sample of 482 firm-year observations from 190 firms firm-year from 2006 to 2018, which obtained from Chinese listed firms. Empirical analysis by using pooled ordinary least squares(OLS) and Fixed Effect (EF) regression model with robust standard error used for analyzing the data. To mitigate the self-selection biases, we use the propensity score matching (PSM) method. To address the endogeneity (i.e. causality and/or simultaneity) issue as well as for the robustness test, we use 2SLS regression analysis with instrumental variables to check the validity of a moderating effect regulation change and PC on the relationship between PC and SOs granted (SOP and SOM). We find that the implement of SO regulations change has a negative effect on SO grants in terms of both size and value, while PC has a positive effect on SO grants. Change in the ESO regulations has negatively moderated the relationship between PC and ESO grants. This evidence suggests that PC lead to increase SO grants before the change in SO regulations but a tightening of ESO regulations inversely moderated that relationship and lead to a reduction in SO grants after 2009. PC firms granted significantly more and worthier stock options to their employees than unconnected firms, but that trend was attenuated after the reform.According results, this research provides crucial info to managers, market regulators and investors to be able to enrich effective stock option regulation process along with impact of PC on stock option in China. Our findings also have important insights for investors and firms, and policy implications for policy-makers and regulators.