The Effect of Employee Stock Bonus on the Earnings Response Coefficient: Empirical Evidence from the Taiwan Stock Exchange

This paper examines the impact of employee stock bonus on the earnings response coefficient for firms listed in the Taiwan Stock Exchange (TaiEx). According to Taiwan’s Law of Corporation of 1980, employee stock bonus in Taiwan is treated as an after-tax distribution of net income, instead of pretax compensation expense. (This accounting treatment will be annulled on January 1, 2008 and replaced by the internationally-adopted expense treatment.) Our study explores whether such accounting treatment attenuates the earnings response coefficient. Employing the Heckman (1976) two-stage correction model and regression analyses, panel data collected from 1997 to 2005 for TaiEx-listed firms was examined to investigate the effects of employee stock bonus on the earnings response coefficient. Our empirical evidence indicates that the market value of employee stock bonus has a negative effect on the earnings response coefficient. A firm’s earnings growth influences the effect of employee stock bonus on the earnings response coefficient. For high earnings-growth firms, investors seem to ignore the diluting effect of employee stock bonus. They might view the employee stock bonus as an incentive for employees to generate more profits for the company. On the other hand, lower earnings-growth firms exacerbate the negative effect of employee stock bonus on the earnings response coefficient.