Stock Option Compensation in Chinese Red Chip firms

We examine equity-based compensation of mainland Chinese controlled firms that are incorporated outside China and trade on the Hong Kong Stock Exchange (referred to as Red Chip firms) over 1990-2005. Stock option compensation is the dominant form of equity- based pay and is widely used among Red Chip firms. However, many characteristics of Red Chip firms' annual stock option grants differ from those of U.S. firms. The annual option grant significantly increases managerial equity ownership but there is no evidence that managerial equity ownership increases over calendar years. In addition, we find that managerial equity ownership declines after the stock option initiation year. Interestingly, Red Chip firms' executives rarely exercise vested stock options during their tenures in the firm. Changes in Hong Kong Stock Exchange's Listing Rules on stock option compensation in 2001 had a significant impact on Red Chip firms' stock option grant practice.