Share-option based compensation expense, shareholder returns and financial crisis

This paper contributes to the literature that analyses the relationship between Share-Option Based Compensation (SOBC) expense and shareholder returns. It utilises a sample of financial firms listed in the European Economic Area and Switzerland between 2005 and 2016 to make inferences about the impact of the financial crisis on the above-mentioned relationship. The paper also assesses the extent to which the relationship between SOBC expense and shareholder returns during the financial crisis varies with ownership concentration. We find evidence that the positive relationship between SOBC expense and shareholder returns is significantly more apparent during the financial crisis. This suggests that investors place more emphasis on the unrecognised intangible features of SOBC contracts during the crisis, even though their associated expenses are subject to managerial discretion and measurement errors. We also find that the positive relationship between SOBC expense and shareholder returns over the financial crisis is more pronounced when ownership is more concentrated. The results of our study are robust after controlling for firm size, potential investment growth opportunities, traditional banking activities and firm self-selection bias.