EMPLOYEE STOCK OPTION PLANS (ESOP) AND COMPANY VALUE (Case on Go Public Company in Indonesia)

Transcription

1 EMPLOYEE STOCK OPTON PLANS (ESOP) AND COMPANY VALUE (Case on Go Public Company in ndonesia) Eddy Winarso Minathi Fajrina Widyatama University - Bandung - ndonesia ABSTRACT This study aims to examine empirically the influence of implementation of Employee Stock Option Plans (ESOP) to firm value. ESOP uses proxy stock price sensitivity (delta) and risk sensitivity (vega) and firm value using a proxy of Tobin's Q ratio with firm size, cost monitoring, operating cash flow, debt to assets as control variables. Research method is used by associative causality method with survey approach The samples were listed public companies in the ndonesia Capital Market and have implemented the ESOP from 2006 to Data source is the financial reporting period fiom 2006 to The Purposive sampling technique, was utilized to select the 9 companies' involved. Multiple regression statistical analysis was used to determine the simultaneous influence of stock price sensitivity (delta), risk sensitivity (vega), and each control variables (firm size, cost monitoring, operating cash flow, debt to assets) to firm value. The results indicate that there were partially significant influence of stock price sensitivity (delta) and risk sensitivity (vega) to firm value, but partially from each of the control variables (fm size, cost monitoring, operating cash flow, debt to asset ) no significant influence to fm value was shown. Simultaneous test results on the other hand indicate that there are simultaneously significant influence of stock price sensitivity (delta) and risk sensitivity (vega) with control variables (firm size, cost monitoring, operating cash flow, debt to assets) to firm value KEYWORDS Employee Stock Option Plans, Company Value, Stock Price Sensitivity, Risk Sensitivity NTRODUCTON As expected shareholders and stakeholders have a interest in the company this one involved with according Sukirno (1985) employees / management as the stakeholders have an important role in the development of their company. But there may be is a mismatch between the desire of employees 1 management as a factor of production with

2 the owner of the company. t can result to actions that do not fit with the vision and mission of company, employee management and owners each have an interest in maximizing their own welfare. This discrepancy is known as agency conflicts (agency problem). According to Gitman (2003) there are two ways to avoid this agency problem. (1) Market forces in actions taken by the major shareholders to provide insurance, pension funds, and a takeover by another to take the vision and mission. (2) Agency cost of expenses to reduce the agency problem, through the monitoring of management, to prove an illegal act on the management 1 employee, and provide management / employee financial incentives. There are two types of management compensation that can be done, namely: (1) incentives plans and (2) performance plans. Performance plans are compensation given to employees as a result of the performance achieved by the employees, while incentives are the most popular plans with stock options providing the opportunity for individual employees a contractual right to purchase a certain number of shares in company throughout a specific time period and pay a set price at grant date. The specific time period is usually between 5 (five) to 10 (ten) years starting on the grant date and the stock price equal to fair market price of the stock at the time of delivery. n ndonesia the implementation of the ESOP is based on several regulations, i.e., Limited Liability Company Act Article 36, BAPEPAM Regulation No. X.A.7; BAPEPAM Regulation No.X.D.4 and Act No which requires the implementation of the ESOP in the country based on PSAK 53 Accounting for Stock-Based Compensation, effective October 1, The purposes of ESOP are as follows: to reward management 1 employees and certain parties for their contribution to the improved performance of the company; increase employee motivation and commitment of management as the owner of the company expected to improve performance and productivity of the company. Previous studies have shown that a positive relationship exists between stocks option to change the company's performance by (1) Mc Connell & Servaes (1990); Yermack (1997); Yuswohady (2002) and Pasternack & Rosenberg (2002). (2) Sessile, et a1 (2001) examined 50 large companies that have implemented programs stocks options during the last 25 years and found that increased equity participation by employees has improved their economic outcomes and social outcomes.

3 w Corporate Productivity Factor 1 Figure 1 Observation hmework ncyntive Plans r ESOP + a Sensitive Stock Price Sensitive Risk (delta) ('Jega) 1 Option Call Method Black and Scholes Formula C = Se-"N(dl) - Xe-"N(d1 - o d ~ Variable Control: - Firm Size - Monitoring Cost -Free Cash Flow - Debt to Asset T Other Factor lnfluence too 1. Firm Value L Note Observation Hypothesis : t is observation Variable lnfluence of ESOP to Firm Value ' : j

4 Assessment of Options The basic Black and Scholes model is the calculation of factors intrinsic value and time value so that the basis of a valuation of stock options by the formula: Call (C) S - Xe n Put (P) =XeWn -S Where S - X reflects the intrinsic value "in the money" call, X - S reflects the intrinsic value "in the money" put and e reflects the value of the concept of time delay with continuous compounding rate. An important breakthrough made by Black and Scholes is the inclusion of factor volatility stock prices and the determination of stock value in determining the value of stock options under the assumption that the uncertainty of returns has a significant effect on the assessment of an option. The formula determining the value of stock options call and put Black and Scholes from'a stock that is not distributed dividends are: Call (C) = Sn (dl)- Xe -nn (d2) Put (P) Xe"nN (d2)- SN (-dl) When the price of S is larger, the value call, dl and d2 should be greater to make N (dl) and N (d2) approach value 1. When the price of S is larger, the input value smaller makes the N (-dl) and N (-d2) approaches the value 0. Problems in calculating the value of stock options with this model is to calculate the cumulative normal distribution function (N), to find N derived from N are available. n this study, call options will be used to calculated the method of Black and Scholes. Factors that affect the value of options Black and Scholes method can be seen in the table below: Table 2.1 Factors that affect the value of options with Black and Scholes Method An increase in Security Price (S) Exercise Price (X) Time to Expiration (T) Risk Free nterest Security Volatility (0) Source: Research by Core and Guay Call Value 1 ncrease Decrease ncrease 1 ncrease 1 ncrease Put Value Decrease ncrease Decrease or ncrease Decrease ncrease

5 The measurement value of stock options is also covered by the regulations in ndonesia according to AS 53 - Accounting for Stock-Based Compensation option pricing models such as models of Black and Scholes or Binomial model. Discussion Effect of Stock Price Sensitivity (Delta) and Variable Control with Company Values Test parameters p (regression test), which first carried out to prove the presence or absence of a significant effect between the variables X1 and variable control of the variable Y simultaneously. Parameter P test is performed using the statistical test F. The results obtained suggests that the first null hypothesis is rejected. This means that there is significant influence between variables stocks price sensitivity (delta) and the control variables (firm size, cost monitoring, operating cash flow, debt to assets) jointly against the firm value variable with the value of F calculated for This can be seen that the calculated F is greater than the F table n other words, F count outside the reception area of Ho (2875> 2772). Based on testing the hypothesis stated there is a significant influence and it did not rule out the existence of other factors that affect firm value. This is evident from the calculation of the coefficient of multiple determination (R2) which shows the number of 0407 or 40.7%. The figure shows the value of the closeness between the variables X1 and variable control of the variable Y. This means that there are other factors outside of the variable sensitivity of the stocks price (delta) and the control variables (firm size, cost monitoring, operating cash flow, debt to assets) such as corporate structure, corporate culture, share ownership, the level of liquidity which may have an influence also on the value of the company with the influence of (1-0407) = 0593 = 59.3%. Test parameters p (regression test) was also performed to prove whether there is significant influence between variables stocks price sensitivity (delta) and the control variables (firm size, cost monitoring, operating cash flow, debt to assets) are partial to the variable value of the company. Test parameters p (regression test) was performed using statistical test t. The results obtained from testing this hypothesis showed a significant effect between the variable sensitivity of stock price (delta) of the variable value of the company and showed that there was no significant effect between the control variables (firm size, cost monitoring, operating cash flow, debt to assets) with the variable value of the company. t can be known from the calculation that t-count > t-table, then: tt count outside the reception area of Ho > t3 count was in the reception area of Ho <2101 fq count was in the reception area of Ho <2101 ts count was in the reception area of Ho <2101 fg count was in the reception area of Ho <2101 Both of the above tests have shown that the variable sensitivity of stocks price

6 (delta) with the variable value of the company having a significant effect, this means the first null hypothesis is rejected. While the control variables (firm size, cost monitoring, operating cash flow, debt to assets) had no significant effect on the variable value of the company, this causes the second null hypothesis is accepted. Effect of Risk Sensitivity (Vega) and Variable Control with Company Values Test parameters p (regression test), which first carried out to prove the presence or absence of a significant effect between the variable X2 and variable control of the variable Y simultaneously. Parameter j3 test is performed using the statistical test F. The results obtained from testing this hypothesis suggests that the first null hypothesis is rejected. This means that there is significant influence between variable sensitivity risk (Vega) and control variables (firm size, cost monitoring, operating cash flow, and debt to assets) jointly against the firm value variable with the value of F calculated for t can be seen that the calculated F is greater than the F table n other words, F count outside the reception area of Ho (2877> 2772). Based on the tests the hypothesis stated there is a significant influence therefore and it did not rule out the existence of other factors that affect firm value. This is evident from the calculation of the coefficient of multiple determination (R2) which shows the number of 0408 or 40.8%. The figure shows the value of the closeness between the variable X2 and variable control of the variable Y. This means that still the presence of other factors outside of the variable sensitivity of the risk (Vega) and control variables (firm size, cost monitoring, operating cash flow, debt to assets) such as corporate structure, corporate culture, share ownership, the level of liquidity which may have influence also on the value of the company with the influence of ( ) = 0,592 = 59.2%. Test parameters j3 (regression test) was also performed to prove whether there is significant influence between variable sensitivity risk (Vega) and control variables (firm size, cost monitoring, operating cash flow, debt to assets) partial to the variable value of the company. Test parameters j3 (regression test) was performed using statistical test t. The results obtained from testing this hypothesis showed a significant effect between the variable sensitivity of risk (Vega) of the variable value of the company and showed that there was no significant effect between the control variables (firm size, cost monitoring, operating cash flow, debt to assets) with variable value of the company. Based on the calculation that t-count > t-table, then: t2 count outside the reception area of Ho > t3 count was in the reception area of Ho < t4 count was in the reception area of Ho < t~ count was in the reception area of Ho <2101 k count was in the reception area of Ho <2101 Both of the above test has shown that the variable sensitivity of the risk (Vega) with a variable value of the company having a significant effect, means the first null hypothesis

7 is rejected. While the control variables (firm size, cost monitoring, operating cash flow, debt to assets) had no significant effect on the variable value of the company, the second null hypothesis is accepted. mplications of Research Findings This study was made to explain the influence of the value of the firm application of the ESOP. The relationship of this effect arises because the application of the ESOP, which may be granted stock options in the future, will be able to align employees' interests with shareholder interests. Therefore, employees who have significant equity interest in the company would have strong incentives to devote his best in maximizing corporate performance and stock value. Thus, employee stock ownership aligns the interests of employees and shareholders. mplications of Research Results Effect of Stock Price Sensitivity (Delta) Against Corporate Value The influence of variable stocks price sensitivity (delta) to' the value of the company provides the opportunity for employees who have earned the right to buy the shares previously allocated at a given time. Employees are going to exercise the option given when the stock value (stock price) is higher than the exercise price (exercise) the option. Because the call option value is increasing it can cause the increase in the value of stocks price, risk free interest, maturity date, and stocks volatility. The existence of this sensitivity is called the hedge ratio (delta). That if there is any change in option price changes in stock prices (stocks price), then the delta value implies that the greater the option value it will be more sensitive to change the value of the shares. When the value of the stock increases, this will also further enhance corporate value. mplications of Research Results Risk Sensitivity nfluence (Vega) Against Corporate Value The influence of variable risk sensitivity (Vega) of firm value due to granting stock options to employees will lead to increased risk from the options given. Vega values reflect changes in volatility option compared with volatility of stock prices. When Vega values are high, it will be more sensitive to changes volatility. mplications of Research Results Effect of Control Variables (Firm Size, Monitoring Cost, Operating Cash Flow, Debt to Assets) Against Corporate Value 1. Firm Size Firm Size is one that is used to control the ratio of enterprise value; the size of a large company may be less efficient than smaller firms because the bigger large companies was control the strategic wisdom of the managers and may be reduced because of the greater functional position. According to Lang & Sultz (1994) in Natalie (2004) there will be a decrease in the value of the company if the company is increasingly large, whereas in the case of smaller companies, it will be more efficient in achieving economies of scale,

8 company, and trained resources and procedures will ensure the achievement of good performance. Firm sizes also measure the market power of firms. 2. Cost Monitoring The ratio of capital to sales, also supported by the research conducted by Himmelberg (1999). Agency theory predicts that in the lower cost of monitoring the more it will increase the value of the company, so it can be concluded that monitoring costs negatively affect the value of the company. 3. Operating Cash Flow According to the research conducted by Jensen (1993) and Natalie (2004) the availability of operating cash flow affects the agency costs set by the company. Because if agency costs are reduced then there is a decrease in operating cash flow in the company, thus, the existence of the ESOP program will reduce operating cash flow because the company does not need to spend cash as a bonus to be given to the employee but rather replaced with shares in the form of options, so that operating cash flow has no effect on firm value. 4. Debt to Asset The ratios of total debt to assets in this study are also supported by Himmelberg (1999), that this ratio does not affect firm value. CONCLUSONS AND RECOMMENDATONS Conclusion The conclusions drawn from the findings are as follows:. There is influence through the application of ESOP stocks price sensitivity (delta), together with control variables of firm value. 2. There is influence the implementation of the ESOP through sensitivities risk (Vega), together with control variables of firm value. 3. There is no influence of each control variable (firm size, cost monitoring, operating cash flow, debt to assets) of firm value. Recommendation Based on this research, the authors provided suggestions that are expected to also serve as a useful input for the parties concerned. Suggestions for Company Suggested for companies to expand and simplify the process of Employee Stock Option Plans (ESOP) for all employees.

9 Suggestions for Further Research 1. Calculate the ESOP implementation of different methods of recording options, so as to compare the methods which option is best for the company. 2. Extending the study sample so that the research conducted to better reflect the state of implementation of ESOP companies already listed on the hdonesia Stock Exchange. For other researchers who will conduct research along this topic, these suggestions are offered:

10 REFERENCE BOOK Bodie, Kane, Marcus, Essentials of nvestment, Fifth Editions, Singapore, McGrawHill. Brigham, Houston, Fundamental of Financial Management, Tenth Editions, United States, Thornson-South Western. Gibson, Charles H, Financial Statement Analysis, Tenth Editions, United States. Gitman, Lawrence J, Principal of Managerial Finance, Tenth Editions, United States. katan Akuntan ndonesia, Standar Akuntansi Keuangan, Jakarta: Salemba Empat. Kaplan, Atkinson, Advanced Management Accounting, Third Editions Singapore, Prentice Hall. Kieso, Weygand, Warfield, ntermediate Accounting, Eleventh Edition, United States of America: John Willey & Sons. nc. Little, Ken, Rencana Pembelian Opsi Saham Karyawan. Terjemahan Prasetyo Handoyo. Penerbit Andi Yogyakarta. Nazir, Moh, Metodologi Penelitian. Cetakan ke 5, Jakarta: Ghalia ndonesia. Priyatno, Duwi, Mandiri Belajar SPSS, Yogyakarta: MediaKom. Santoso, Singgih, Buku Latihan SPSS Statistik Parametrik, Jakarta: Elex Media Komputindo. Sembiring, R, Analisis Regresi, Bandung, Penerbit TB. Wild, Halsey,Subramanyam,2005.Financial Statement Analysis, Eighth Editions, Singapore, Mc Graw - Hill. JOURNAL Baur, Michael. ; Quintero, Sorocco. ; Young, Leslie Executive Stocks Options, Journal of Financial and Strategic Decition, Summer: Volume 10 No.2. Brookfield, D.; Onnrod, P Executive Stocks Options: Volality, Managerial Decision and Agency Cost, Journal of Multinational Finance Management, February: Carpenter, Jennifer, N Does Options Compensation ncrease Managerial Risk Appetite?, The Journal of Finance, October: Volume LV, No. 5. Core, John. ; Guay, Wayne Estimating The Value of Employee Stocks Options Portofolios and Their Sensitivities to Price anf Volality, Journal of Accounting Research, June: Volume 40 No. 3. Pasternack, Daniel. ; Rossenberg, Matts The mpact of Stocks Options ncentives on nvestment and Firm Value (Not Published). Sulistyanto, Sri, H. ; Prapti, Menik, S Stocks Options Benarkah Mendorong Manajer Opotunis, Jurnal Bisnis dan Ekonomi Kinerja, Oktober: Volumem 1 No. 2. Sulistyanto, Sri, H. ; Wibisono, Haris Stocks Options Good News atau Bad News, Jurnal Bisnis dan Ekonomi Kinerja, Desesmber: Volume 6 No. 2. Tim Studi Penerapan ESOP Emiten atau Perusahaan Publik di Pasar Modal

11 OTHER ndonesia Studi Tentang Penerapan ESOP atau Perusahaan Publik di Pasar Modal ndonesia. Anggara, Arie, "Analisis Perbandingan Produktivitas Karyawan Sebelum dan Sesudah Penerapan ESOP." (Studi kasus pada perusahaan yang telah menerapkan ESOP). Universitas Widyatama; Skripsi Tidak Dipublikasikan. Melani, "Analisis Perbandingan Kinerja Perusahaan Sebelum dan Sesudah Penerapan ESOP." Universitas Padjadjaran; Skripsi Tidak Dipublikasikan. Purnamawati, Nenden, "Analisis Perbandingan Produktivitas Karyawan Sebelum dan Sesudah Penerapan ESOP." (Studi kasus pada perusahaan yang telah menerapkan ESOP). Universitas Padjadjaran; Skripsi Tidak Dipublikasikan. Wibawa, Ardya, Sam, "Analisis Perbandingan Produktivitas Karyawan Sebelum dan Sesudah Penerapan ESOP." (Studi kasus pada perusahaan yang telah menerapkan ESOP). Universitas Padjadjaran; Skripsi Tidak Dipublikasikan. Yohanes, "Pengaruh Employee Stocks Options Plans Terhadap Kine rja Perusahaan dan mplikasinya Terhadap Nilai Perusahaan." (Studi kasus pada perusahaan yang telah menerapkan ESOP). Universitas Padjadjaran; Skripsi Tidak Dipublikasikan. WEBSTE www. yahoo. finance.com