Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
Corporate Social Responsibility Engagement, CEO Tenure
and Corporate Financial Performance: Evidence from
Australian Public Minerals and Metals Firms
Chao Biana, Christopher Ganb, ZhaohuaLic and Baiding Hud
The current study examines the relationships among corporate social responsibility
(CSR) engagement, corporate financial performance (CFP) and Chief Executive
Officer (CEO) tenure. Using provisions for site rehabilitation as a new proxy for CSR
engagement, we find a positive CSR-CFP(as measured by Tobin’s Q) association
only in our sub-sample containing CEOs whose tenure is below the median tenure.
Our results suggest that CEO entrenchment resulting from long tenure maydestroy
the positive CSR-CFP association.
Keywords: Corporatesocial
–CEO–minerals and metals.
responsibility
–corporate
financial
performance
1. Introduction
Debate about corporate social responsibility (CSR)hasfocused on whether CSR
engagement increases shareholder value(Jo and Harjoto 2012);empirical results
are,at best, mixed.Most prior empirical studies have not examined the
relationshipsamongCSR, corporate financial performance (CFP) and Chief
Executive Officer (CEO) tenure. CEO entrenchment resultingfrom long tenure could
potentially weakenthe CSR-CFP association.Hence, it is imperative to
investigatewhether CEO tenure plays an influentialrole in the CSR-CFP association.
There are various definitions of CSR. Friedman (1970)defines CSR as actions to
make as much profit as possible in order to meet shareholders’ desires while
complying with legal and ethical requirements. McWilliams and Siegel (2001)and
Carroll (2008)emphasise CSR as actions to contribute some social wellbeing
beyond financial interests and legal obligations. Hill et al. (2007)expand the CSR
definition to cover legal, economic, ethical and philanthropic actions that could
benefit the firm’s stakeholders.
The literature presents different views on possible CSR and CFP relationships. The
first view assumes a positive CSR-CFP association based on the conflict resolution
hypothesis in stakeholder theory proposed by Freeman (1983). According to the
conflict resolution hypothesis, CSR activities will mitigate conflicts between
executives and other stakeholders and, as a result, CFP will increase. The second
viewassumes a negative CSR-CFP link based on the agency theory of Jensen and
Meckling (1976). Specifically, Barnea and Rubin (2010)find that insiders (executives
and large blockholders) are more likely to overinvest in CSR, leading to reduced firm
value. The value-irrelevance view assumes that CSR engagement has no impact on
________________________________________________________________
a
Lecturer,PhD Candidate,Faculty of Agribusiness and Commerce, PO Box 85084, Lincoln University,
Canterbury, New Zealand. Email: chao.bian@lincolnuni.ac.nz.
b
Corresponding author,Professor, Faculty of Agribusiness and Commerce, PO Box 85084, Lincoln
University, Canterbury, New Zealand.Email: christopher.gan@lincoln.ac..nz.Phone: 64 3 4230227
EXT: 30227.
c
Senior Lecturer,Faculty of Agribusiness and Commerce, PO Box 85084, Lincoln University,
Canterbury, New Zealand. Email: zhaohua.li@lincoln.ac.nz.
d
Senior Lecturer,Faculty of Agribusiness and Commerce, PO Box 85084, Lincoln University,
Canterbury, New Zealand.Email: baiding.hu@lincoln.ac.nz.
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
CFP because CSR factors may not proxy risk that could impact firm value(Jo and
Harjoto, 2012). The last view of the CSR-CFP relationship suggests a non-constant
relationship between CSR and CFP, because of the possibility that the costs and
profits produced by CSR differ over time (Soana, 2011).
This study has the following motivations: First, there is a gap in the literature
whetherCEO tenure plays a key role in influencing the CSR-CFP association.The
CEO entrenchment hypothesis suggests that a CEO with long tenure, may become
entrenched(Berger et al. 1997), resulting in reduced shareholder value (Bulan et al.
2010; Fahlenbrach and Stulz 2011). Second, little study has shed light on the
moderating effect of an industry’s ‘boom-burst’ cycle on the CSR-CFP relationship.
This study aims to fill theabove literature gap by addressingthe endogenous CSR
engagementusing a 2-step least squares (2SLS) estimation method, based on a
panel data set drawn fromthe 40 largest Australian-listed minerals and metals (M&M)
firms for the period 2003 to 2012. Our results reveal that the positive CSR-CFP
association does not hold in the ‘more-seasoned CEO’ sub-sample, which
supportsthe viewthat more entrenched CEOs are less likely to commit to
value-enhancing CSR engagement, at the expense of shareholders’ value.We also
find evidence that in the mining cooling-off period, a CEO is more likely to increase
the REHAB, which may lead to increase in the firm’s CFP.
This study also extends current literature by using a new measure for CSR
engagement, provisions for site rehabilitation, as an industry-specific alternative to
measure CSR engagement in aggregate such as Kinder, Lydenberg and Domini’s
(KLD) CSR ratings (Jo and Harjoto 2012; Manner 2010).Not all states in Australia
obligate M&M firms to rehabilitate the environment; hence, provisions for site
rehabilitation could serve as an alternativemeasure for a firm’s CSR engagement.
The remainder of the paper is organised as follows. Section 2 provides the theoretical
background of the study. Section 3 describes the data, variables and methodology.
The empirical results are presented in Section 4. Section 5 concludes the paper.
2. Hypothesis Development
As argued byFreeman (1983) and shown by Jo and Harjoto (2012), CSR activities
reduce conflicts between executives and other stakeholders; subsequently, CFP will
be increased. Stakeholder theory proposed by Freeman (1983) states that
executives should act as coalition-builders among the external stakeholders
including government, community, consumer, competitors, the media, the
environment and others; hence, a firm could use CSR as an extended corporate
governance mechanism to resolve conflicts between executives and other
stakeholders(Freeman 1983).To refine stakeholder theory, Donaldson and Preston
(1995) examine the normative, descriptive and instrumental dimensions of the
theory integratively. Donaldson and Preston conclude that those three dimensions
are mutually supportiveand, among them, the normative dimension is fundamental.
Freeman (1994) adds the metaphorical dimension to the stakeholder theory, which
addresses the question–“How should human beings live?”.Another literature strand
argues that CSR has a positive impact on CFP because CSR increases a firm’s
competitive advantage, such as customer and employee loyalty (Ribstein 2005)and
reputation (Turban and Greening 1997).
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
On the other hand, Jensen (2002) criticises the stakeholder theory because it does
not account for the necessary trade-offs among the competing interests of
stakeholders. The author proposes the enlightened stakeholder theory, which states
that a firm’s long-term value maximisation dictates the firm’s multiple objectives and
the firm’s stakeholders can benefit from this enlightened value maximisation.
According to Jensen, as long as a firm’s main objective is value maximisation, there
is no problem for the firm to engage in CSR.
Another view assumes that CSR reduces CFP. Friedman (1970)suggests that
CSRdestroysCFP becauseeconomic costs exceed economic benefits produced by
activities related to social responsibility. Based on the agency theory of Jensen and
Meckling (1976), Barnea and Rubin (2010) find that insiders (executives and large
blockholders) are more likely to overinvest in CSR to increase their reputation as
good global citizens. Hence, CSR overinvestment tends to increase the opportunity
cost of wasted resources and reduces the firm’s value (Barnea and Rubin 2010).
Jo and Harjoto (2012)describe the value-irrelevance view similar to irrelevance
theory of capital structure of Modigliani and Miller (1958). Jo and Harjoto argue that
CSR may not affect CFP because CSR factors may not proxy risk that could impact
a firm’s value.The last view of the CSR-CFP relationship assumes a non-constant
relationship between CSR and CFP, becauseit ispossible that the costs and profits
produced by CSR are different over time (Soana 2011).
Another literature stand focuses on the effects of CEO characteristics on a firm’s
level of CSR engagement. Waldman and Siegel (2008)argue that it is problematic
not to consider the effects of leadership characteristics when examining the
differences in firms’ CSR initiatives.Manner (2010)suggests that observable CEO
characteristics, to some degree, predicta firm’s level of CSR engagement. The CEO
characteristics used in Manner’s study include concentration area of bachelor’s
degree, breadth of career experience, gender, and compensation level. Manner
finds that a bachelor’s degree in humanities, breadth of stakeholder experience,
female CEO and short-term compensation are positively associated with a firm’s
CSR engagement level. Mannersuggests that a high level of long-term CEO
compensation is an indicator of a lack of focus on CSR.
This study teststhe moderating effect of CEO entrenchmenton the CSR-CFP
relationship resulting from CEO tenure. The CEO entrenchment hypothesis states
that a CEO with long tenure may become more entrenched and influence the board
of directors to introduce less-risky firm polices, such as lower leverage and weak
equity-based compensation incentives(Berger et al. 1997); subsequently,
shareholder value is reduced (Bulan et al. 2010; Fahlenbrach and Stulz,
2011).Hermalin and Weisbach (1998)suggest that diligent monitoring by the board
weakens when along-tenured CEO’s negotiating power increases because the CEO
has great influence over board members in selecting new board members.The
following relationship is hypothesized:
Hypothesis 1: a firm’s financial performance (measured by Tobin’s Q) is negatively
associated with the CEO’s tenure.
On the other hand, a less-seasonedCEO, is more likely to be motivatedto undertake
long-term value-enhancing CSR initiatives. This is because less-seasoned CEOs
are less-entrenched and need more recognition and support from the firm’s
shareholders to secure a long-term employment contract. Hence, the CSR
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
engagement level is more likely to have a positive impact on CFP in firms
managedby less-seasoned CEOs:
Hypothesis 2: Corporate social responsibility engagement (measured by provisions
for site rehabilitation) has a positive impact on corporate financial performance only
in firms managed by less-seasoned CEOs.
Figure. 1 shows that, except for 2005, the mean provisions for site rehabilitation
scaled by sales (REHAB) declined steadily from 2003 to 2010. The decline in the
mean REHAB from 2003 to 2010 is because of the decrease in the provisions for
site rehabilitation and the increase in company sales from the mining boom, which
started in 2003 and ended in in 2008 with the global financial crisis. (Filippou and
King, 2011).The rise in 2005 is likely due to the wide adoption of the Global
Reporting Initiative (GRI) reporting protocol in 2005). The goal of GRI is to help firms
account for contributions made to the natural environment and to make sustainability
reporting routine financial reporting (GRI, 2013). The rapid increase in REHAB after
2010 is likely because of the increase in provision for site rehabilitation and the
decrease in the company sales as a result of the cooling of the mining boom.
% of sales
Figure 1: Mean Provisions for Site Rehabilitation Scaled by Sales (2003-2012)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Year
Sources: Annual financial reports for 2003 to 2012 from companies’ websites.
Ina mining boom period, a CEO is less concerned with the firm’s market value or his own
pay; hence, the CEO has little incentive to commit to value-increasing CSR engagement; on
the other hand, when the market cools off, the CEO may have more incentive to improve the
firm’s share performance becausepart of the CEO’s pay is share-based.Thus, in the mining
cooling-off period, a CEO is more likely to increase the REHAB, which may lead to increase
in the firm’s CFP. Hence, the CSR engagement level is more likely to have a positive impact
on CFP in the non-booming period.
Hypothesis 3: Corporate social responsibility engagement (measured by provisions for site
rehabilitation) has a positive impact on corporate financial performance only in the
non-booming period.
3. Data and Econometric Modelling
3.1. Data
This study employs a sample of the 40 largest M&M firms in the Australian Securities
Exchange (ASX) and Standard and Poor’s (SandP) 200 index for the period 2003 to 2012.
The firm and CEO characteristics data are obtained from the sample firms’ 2003-2012
annual reports. CEO remuneration such as option holdings are from the remuneration
reports; other CEO characteristics and board composition information are from the
appropriate sections of the board of directors’ reports; provisions for site rehabilitation and
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
other firm information such as book leverage are from the financial reports. The daily share
returns information are from Thomson Reuters DataStream.
3.2. Variables
3.2.1. Dependent Variable
There are two measures of firm financial performance in the corporate governance literature.
One is an accounting measure such as return on assets (ROA) and return on equity
(ROE)(Adams and Amel 2005; Fahlenbrach and Stulz 2011). Another measurefocused on
share market price or valuation ratio is Tobin’s Q. Tobin’s Q is equal to the ratio of the sum of
the market value of equity and the book value of debt to the replacement cost of firm’s assets
in place, which can be represented by book value of assets (Aggarwal and Samwick 2006).
Tobin’s Q is commonly used as a proxy for firm performance (Dong et al. 2010; Jo and
Harjoto 2012).
3.2.2. Endogenous Explanatory Variable
Jo and Harjoto (2012) and Waddock and Graves (1997)argue that CSR engagement may
increase a firm’s value; vice versa may also hold, i.e., higher-market-performance firms may
invest more in CSR activities. We measureendogenous CSR engagement byprovision for
site rehabilitation, which is a long-term liability in a firm’s balance sheet. Provision for site
rehabilitation represents a firm’s obligation to carry out environment-friendly activities, such
as plant and waste site closure, current and subsequent monitoring of the environment,
re-contouring, top soiling and re-vegetating disturbed areas, and removal of mine waste and
residual material (Alumina 2012).We choose provision for site rehabilitation to measure CSR
engagement in the M&M industry because the public is concerned about the environmental
and economic costs of the M&M industry. The value of natural resources (such as iron ore)
is translated through intensive exploration, extraction, processing and handling activities by
the M&M firms (Kinnear and Ogden 2014). These processes absorb substantial water and
energy and cause severe damage to the natural environment. Therefore, it is imperative that
the M&M industry investsmore financial resources to restore a more sustainable natural
environment.
3.2.3. Independent Variables
CEO tenure isthe main CEO entrenchment proxy in this study. Wealso useCEO age and
board insider ratio as other CEO entrenchment proxies. Finkelstein and Hambrick (1989)
argue that a CEO’s seniority in the firm increases the CEO’s power in the board of directors
in which there is a large crowd of the CEO’s followers. Inside directors are more willing to
bow to the CEO’spreference in designing remuneration packages, because there is a huge
power distance between them and the CEO(Finkelstein and Hambrick 1989).
Manner (2010)examines only the effect of compensation level on CSR engagement and
suggests that further study is needed to explore the effect of incentives embedded in CEOs’
long-term compensation plans on CSR engagement. We include in our model CEO
equity-based portfolio incentives delta and vega, which potentially affect Tobin’s Q.The
pay-performance sensitivity (delta) is commonly defined as the change in the dollar value of
a CEO’s wealth for a 1% change in share price (Bulan et al. 2010; Core and Guay 1999).
Delta has mixed effects on Tobin’s Q. First, delta is regarded by corporate finance
researchers as interest-aligning or effort incentives (Garvey and Mawani 2007). When a CEO
holds common stock or stock options, his or her wealth depends on the firm’s share
performance. Hence, in order to profit from the allotted call options, high-delta CEOs have to
adopt positive net present-value projects to drive up the spot market share price (Jensen and
Meckling 1976; Jensen and Murphy 1990). However, as a firm’s share price fluctuates, the
returns to the incentive plan become uncertain and high-delta CEOs experience equity risk
(Guay 1999). As a result, the undiversified CEO will forgo risky, but
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
valuing-enhancingprojects; subsequently, the firm’s market performance decreases (Bulan
et al. 2010; Smith and Stulz 1985).
Previous studies argue that the pay-risk sensitivity (vega)is a risk-increasing incentive (Coles
et al. 2006; DeYoung ey al. 2013). Vega is defined as the change in the dollar value of a
CEO’s wealth for a 1% change in the volatility of share returns(Coles et al., 2006; Core and
Guay, 1999; Fahlenbrach and Stulz 2011). Schultz (1998) points out that the human brain
sends signals to stimulate humans to take actions to pursue a reward when there is a high
level of uncertainty coupled with future reward. Schultz’s paper may help explain why
high-vega CEOs (who are rewarded by volatility) are expected to have more incentives to
take risks.Coles et al. (2006)find that risk-increasing vega increases firms’ use of risky
investments and financial policies. If risky corporate policy is value-maximising, then vega is
expected to have a positive effect on CSP.
In this study, dollar delta or vega is equal to delta or vegaper option times the number of
share options granted. A CEO’s portfolio dollar delta or vega at the end of each year is equal
to the weighted average of all dollar deltas or vegasin the CEO’s option portfolio. The study
assumes that option grants in Australia are meant to increase the CEOs’ incentives.
Consistent with previous studies (Coles et al. 2006; Dong et al. 2010), we use the modified
the Black-Scholes (BS) formula (Merton, 1973) to value a CEO’s outstanding option portfolio,
delta and vega. We assume the expiry time for non-vested (non-exercisable) options is
equal to the term to expiry of the vested options plus two years, since the options become
exercisable (vested) two years after the options are granted to the CEOs. Therefore, the fair
price of the outstanding option portfolio, option portfolio delta and vega in any given year is
equal to the weighted average of the fair price, deltas and vegas of recent issued vested,
non-vested options, previously issued vested, and previously issued non-vested options.
The detailed construction of CEOS’ option portfolio fair price, vega and delta is presented in
Appendix A.
We also testthe effect of CEO cash compensation on Tobin’s Q. Guay (1999) adds CEO
cash compensation in his OLS model to control for CEO external wealth and suggeststhat
the higher the CEO’s external wealth, the more risk-taking the CEO will be. However, Coles
et al. (2006) arguethat the higher the cash component in the CEO’s total compensation, the
more likely the CEO is to be entrenched and avoid seeking risky projects. Another reason to
control for cash compensation is that some bonuses and short-term incentives are linked to
the firm’s performance.
3.2.4. Control variables
Firms’ book leverage is controlled in our model. According to the pecking order theory
(Fama and French 2002), there is a negative association between the firm’s leverage and
financial performance. Another reason for controlling leverage is that a higher-leveraged
firm is more exposed to liquidity risk, and the firm’s CEO is more likely to be risk-averse
(Bathala and Rao, 1995). We also control for firm size using the natural logarithm of sales,
given that a firm’s size has a possible impact on the firm’s market value through the firm’s
financing choice between debt and equity (Dong et al. 2010).Further, we control for the
firm’s hedging activities withDERIVATIVE(measured by fair value of foreign exchange
derivatives divided by sales). If the foreign exchange rate fluctuates adversely for the
exporter (all sampled firms are exporters), then CSP may be reduced. We use a year
dummyYEARto control for year effects.
3.3. Research methodology
To disentangle the unclear direction of causation between the endogenous CSR
engagement (measured by REHAB) and the firm’s financial performance(measured by
lnTobin’s Q), we use a 2SLS estimation method with the following equation:
′
, =
, ,
, ,
, ,
, ,
, ,
, , (4)
=
,
,
,
,
,
,
,
,
,
,
,
, .(5)
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
Table 1.Variable Definitions for Equations (4) And (5)
Variable
CFP proxy
Tobin’s Q
CSR proxy
REHAB
CEO and firm characteristics
AGE
CASH
DELTA
VEGA
DERIVATIVE
E&D
LEVERAGE
SALES
TENURE
YEAR
Definition
(Book value of debt + market value of equity)/book value
of asset
Provisions for site rehabilitation/sales
Age of CEO
CEO cash salary + bonuses + short term cash incentives
Change in the dollar value of a CEO’s options portfolio
for a 1% change in the share price/total compensation
Change in the dollar value of a CEO’s options portfolio
for a 1% change in the share return volatility/total
compensation
Year-end fair value of foreign exchange derivative from a
firm's financial report/sales
Investment in exploration and mine development/sales
Book value of assets - book value of equity)/book value
of equity
Sales in AUD$ millions
Number of years a CEO has been employed in the
current position
Year dummy
Table 1 presents the definitions of variables used in equations (4) and (5). We take the
natural logarithm of Tobin’s Q, sales, and book leverage in order to make the skewed
variables more normally distributed. In addition, we use CEO total compensation to scale
delta, because both Hagendorff and Vallascas (2011) and Liu and Mauer (2011) argue that
a CEO’s large absolute dollar values of delta may be relatively small compared with the
CEO’s wealth; hence, scaled delta provides a better representation of the economic
incentives in the CEO’s incentive plans.
The instrumental variable (IV) for provision for site rehabilitation (REHAB) is exploration and
development (E&D) expenses. Mudd (2010) argues that for the M&M firms, true
environmental sustainability commitment depends on technology innovation and scientific
knowledge, in addition to social and environmental factors. Similarly, Filippou and King
(2011) argue that the biggest exploration and development expense in the M&M industry is
improvingextraction and metallurgical processes such as remote control systems and robots
for underground mines. Thus, we use investment in exploration and mine development (the
sum of exploration and mine development expenses divided by sales) as an IV for
REHAB.We report the OLS first-stage partial F-statistics and Hausman test results in the
estimated results section to show that our IVs are valid.
4. Results
4.1. Descriptive Statistics
Table 2 presents the descriptive statistics for the 40 largest ASX-listedM&M firms for the
period 2003to 2012. We winsorise1all the variables at the 1stand 99th percentiles to ensure
that outliers do not affect the results.
1
Winsorisation is used to replace the extreme values in the data with selected values closer to the middle of
the distribution to decrease the impact of possible outliers (Coles et al., 2006).
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
Table 2.Descriptive statistics for the 40 largest ASX M&M firms:2003-2012
Mean
SD
Min
Median
Max
Obs
Firm characteristics
Tobin's Q
3.388
4.911
0.251 1.97
43.537
400
LEVERAGE
0.668
1.803
0.001 0.299
25.275
400
E&D
16.312
84.222
0
0.357
1196.92
400
DERIVATIVE
1.382
5.12
0
0.0349
52.377
400
INSIDER
0.278
0.141
0
0.25
0.75
400
REHAB
3.318
43.308
0
0.069
863.3
400
SALES
1868.689 8492.369 0.008 21.632
73320.42 400
(AUD$ millions)
CEO characteristics
AGE (years)
51.7
6.601
33
52
69
400
CASH (Cash pay/total
0.493
0.349
0
0.468
1
400
pay)
DELTA
0.009
0.01
0
0.01
0.1
271
VEGA
0.005
0.008
0
0.003
0.085
272
TENURE (years)
5.305
3.593
1
4
19
400
Note: All monetary data are in 2012 prices.
Sources: Annual financial reports for 2003-20012 from companies’ websites.
The mean Tobin’s Q for the sampledM&M firms is 3.388, which is higher than the 1.58 for
the 200 largest Australian firms in Schultz et al.'s(2010) study. This difference could be
explained bythe smaller sample size (40 firms) in the current study and by the
M&Mindustry’s outperformance over non-M&Mindustries during the mining boomfrom 2003
to 2008.
% of sales
Figure 2.Mean exploration and development (E&D) intensity: 2003-2012.
40
35
30
25
20
15
10
5
0
2003
2005
2007
2009
2011
Year
Sources: Annual financial reports for 2003 to 2012 from companies’ websites.
We useE&D (investment in exploration and development/Sales) as the proxy for technology
innovation. Table 2showsthat the E&Dmean is 16.312, which suggests that, on average,
firms invest about 16% of their sales in E&Dactivities. Figure 2 shows that the E&Dmean
was about 7% in 2003 and increased dramatically from 2004 to 2006, which is likely due to
the increase in the absolute E&D spending in 2004 and 2005. The rapid decrease inE&D
after 2007 is likelybecause of cuts in E&D spending after 2006 and the negative impact of
the global financial crisis on the demand for minerals and metals.
Table 3 presents the correlations between the variables in equations (4) and (5). The
Pearson correlation matrix shows that there are some significant correlations between the
explanatory variables. We note that CEO tenure (TENURE) is negatively correlated with
derivative use (DERIVATIVE), which suggests that more seasoned CEOs are less willing to
hedge the firm’s risk with financial derivatives.In addition, TENURE is positively correlated
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
with CEOs’ risk-deceasing incentive delta, which implies that more seasoned CEOs are more
likely to influence board members to introduce higher-delta compensation schemes at the
expense ofa reduction in firm value. Further, we observe that more seasoned CEOs are more
likely to manage larger firms (the correlation coefficients between TENURE and lnSALES is
0.165).Table 3 shows there is a positive a significant correlation between REHAB and E&D
(0.346), which is consistent with the argument that CSR engagement inthe M&M industry
depends on technology innovation.
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
Table 3: Correlation matrix
VEGA
REHAB
DERIVATIVE E&D
DELTA
CASH
lnLEVERAGE lnSALES
AGE
1.000
0.040
1.000
(0.422)
E&D
0.346
0.081
1.000
(0.000)***
(0.108)
DELTA
-0.011
-0.035
0.048
1.000
(0.855)
(0.569)
(0.433)
1.000
VEGA
0.024
-0.008
0.005
0.749
(0.678)
(0.896)
(0.941)
(0.378)
0.014
CASH
0.005
0.113
-0.047
-0.351
1.000
(0.818)
(0.918)
(0.023)**
(0.350)
(0.000)***
0.177
lnLEVERAGE -0.032
-0.213
-0.089
-0.146
0.041
1.000
(0.524)
(0.000)*** (0.078)*
(0.017)** (0.004)*** (0.410)
-0.104
lnSALES
-0.147
-0.188
-0.297
-0.035
-0.013
0.276
1.000
(0.087)*
(0.003)***
(0.000)*** (0.000)*** (0.566)
(0.792)
(0.000)***
0.092
AGE
-0.078
-0.114
0.005
0.077
0.003
-0.011
0.064
1.000
(0.131)
(0.117)
(0.022)**
(0.919)
(0.204)
(0.947)
(0.822)
(0.205)
-0.010
TENURE
-0.046
-0.153
-0.035
0.201
-0.023
0.169
0.165
0.213
(0.356)
(0.002)*** (0.491)
(0.001)*** (0.210)
(0.645)
(0.164)
(0.001)*** (0.000)***
0.002
INSIDER
-0.010
0.127
0.073
0.065
-0.093
-0.292
-0.147
-0.216
(0.968)
(0.842)
(0.011)**
(0.142)
(0.286)
(0.063)* (0.000)***
(0.000)*** (0.000)***
Note: p-values are in the parenthesis. *** Significant at the 1% level; ** Significant at the 5% level; * Significant at the 10% level.
TENURE INSIDER
REHAB
DERIVATIVE
1.000
-0.004
(0.934)
1.000
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4.2. Estimation Results
4.2.1. Full Sample Regression
In this section, we present the impact of CSRengagement on CFP. We estimate equations (4) and (5)
using the 2SLS methodto control for firm fixed effects. In the first-stage of 2SLS, current REHAB is
regressed on the instrument (E&D), all independentand control variables; in the second stage,
currentlnTobin’s Qis regressed on all independent and control variables and the predicted values of
REHAB obtained in the first-stage regression. Table 4documents the results both stage estimations.
Table 4.Impact of CSR on CFP (full-sample)
First-stage
Second-stage
REHAB
lnTobin’s Q
CSR proxy
REHAB
CEO and firm characteristics
TENURE
DELTA
VEGA
CASH
lnLEVERAGE
lnSALES
AGE
INSIDER
DERIVATIVE
Year
CEO_CHANGE
Instrument
E&D
0.004
(0.002)**
0.493
(1.461)
-460.846
(582.503)
665.846
(670.503)
8.996
(13.747)
1.283
(3.202)
-2.785
(2.122)
-0.901
(0.870)
5.241
(33.903)
-0.227
(0.839)
Yes
Yes
-0.038
(0.019)**
30.768
(34.568)
-37.768
(38.568)
-1.239
(0.176)***
0.016
(0.041)
-0.004
(0.028)
0.004
(0.011)
0.667
(0.427)
-0.009
(0.107)
Yes
Yes
0.227
(0.040)***
Partial F-statistic
5.41 (p-value= 0.000)
.
Hausman test (p-value)
0.000
Rho
0.41
0.39
R2 (within)
0.46
0.38
N
369
369
Note: The parameter estimates are shown first and standard errors are in parentheses.
*,** and *** denote significant at 10%, 5% and 1% respectively. All variables are defined in Table 2.
Evidence fromthe second-stage regressionin Table 4 showsthat the CSR engagement proxy, REHAB,
has a strong positive effect on Tobin’s Q. The coefficient estimate onREHAB is 0.004, which implies
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that a one-unit increase in scaled provisions for site rehabilitation will increase Tobin’s Q by about
0.4%. This evidence supports the conflict-resolution hypothesis, where CSR engagement acts as a
conflict-resolution mechanism between stakeholders and CEOs.
As hypothesized in hypothesis (1), the results of the second-stage regression in Table 4show that
CEO tenure has a significant and negative impact on Tobin’s Q at the 5% level. The coefficient
estimate -0.038 suggests that a one-year increase in CEO tenure will decrease Tobin’s Q by about
3.8%. This evidence supports the management power theory, where an entrenched CEO may have
greater power to influence the board of directors to introduce risk-decreasing polices, such as
high-delta compensation plans, at the expense of reduced shareholders’ value (Bulan et al. 2010;
Fahlenbrach and Stulz 2011).
The resultsof the second-stage regression column reveal that CEO cash compensation
(CASH)including cash salary, bonuses and short term cash incentives,has a significant negative
impact on Tobin’s Q at the 1% level. The coefficient estimate -1.239 suggests that a one-unit
increase in CEO cash compensation will decrease Tobin’s Q by about 1.24 times.This supports the
argument that the higher the cash component in the CEO’s total compensation, the more likely the
CEO is to be risk-averse and avoid seeking risky projects (Coles et al. 2006); subsequently, the firm’s
CFP is reduced.
The following diagnostic tests are conductedto ascertain that the IV used in 2SLS estimation is valid.
First, the partial F-statistic (5.41)p-value = 0, which suggests that the population parameters of IVs
are not jointly zero. Second, the Hausman test strongly rejects the null hypothesis of exogeneity of
delta and vega (p-value = 0), which implies that the 2SLS estimate is more preferable than the OLS
estimate. Based on the partial F-statistic and the Hausman test, we conclude that the 2SLS estimate
is valid and appropriate.
4.2.2. Sub-Sample Regression Based On CEO Tenure
Our full-sample results show that CEO tenure has a significant negative impact on Tobin’s Q.
However, the full-sample results in Table 4did not addresswhy different CEOs with different tenure,
may undertake different levels of value-enhancing CSR (Manner 2010). Therefore, we test our
hypothesis (2)based on two sub-samples: sub-sample (1): CEOs with tenures below the median
tenure (four years) and sub-sample (2):CEOs with tenures including and abovethe median
tenure.Table 5 reports only the second-stage 2SLS results from equations (4) and (5).
Our sub-sample evidence supports hypothesis (2) that corporate sustainability performance
impacts financial performance positively only in less-seasoned-CEO firms. The results in column (1)
(‘Less-seasoned-CEO’sub-sample) in Table 5show that the sign and magnitude of the estimated
coefficient REHAB (0.004) is similar to those documented in Table 4.These findings support our
hypothesis (2),whichimplies that less-seasoned CEOs are more likely to undertake value-enhancing
CSR engagement. On the other hand,Table 5 shows theestimated coefficientREHABin
‘More-seasoned-CEO’sub-sample isinsignificant, which supports our expectation that long-term
CSR engagement has no effect on firm value in entrenched-CEO firms.
In addition, the sign of the estimated coefficientTENUREin column (2)Table 5is negative and
significant at the 10% level. TheCEO cash compensation has a similar significant negative effect on
Tobin’s Q across the two columns at the 1% level. These findings imply thatas a CEO becomes more
seasoned, the CEOis more entrenched and has greater power to influence the board of directors to
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set risk-decreasing firm policies (such as high-delta and high-cash compensation), at the expense of
theshareholders’ value (Bulan et al. 2010; Fahlenbrach and Stulz 2011).
Table 5.Second-stage 2SLS results of Impact of REHAB on lnTobin’s Q(Sub-sample results)
Dependent Variable: lnTobin’s Q
(1)
(2)
Less-seasoned-CEO
More-seasoned-CEO
REHAB
0.004
0.010
(0.001)***
(0.035)
TENURE
-0.030
-0.098
(0.089)
(0.053)*
DELTA
58.975
7.425
(51.440)
(6.493)
VEGA
-53.846
-53.764
(49.503)
(51.407)
CASH
-1.576
-1.344
(0.536)***
(0.337)***
lnLEVERAGE
0.025
0.136
(0.101)
(0.120)
lnSALES
0.001
0.037
(0.047)
(0.067)
AGE
0.000
0.019
(0.019)
(0.024)
INSIDER
0.351
1.654
(0.977)
(0.998)
DERIVATIVE
0.012
0.022
(0.022)
(0.121)
YEAR
Yes
Yes
CEO_CHANGE
Yes
Yes
Partial F-statistic
3.25 (p-value = 0.000)
2.96 (p-value = 0.000)
Hausman test (p-value)
0.000
0.000
Rho
0.52
0.48
2
R (within)
0.49
0.36
N
146
205
Note: The parameter estimates are shown first and standard errors are in parentheses. *, ** and
*** denote significant at 10%, 5% and 1% respectively.
4.2.3. Sub-Period Regression
The results in ‘Cooling-off period’ column, in Table 6, show that the sign ofthe coefficient estimate
on REHAB (0.002) is significantly positive at the 5% level; whereas the sign of the coefficient
estimate on REHAB is not significant in ‘Boom period’ column. These findings provide some
evidence supporting our hypothesis (3) that CSR engagement level is more likely to have a positive
impact on CFP in the non-booming period. Our sub-period results, hence, show that industry cycle
has a moderating effect on the CSR-CFP association: a CEO, whose pay is partially equity-based,
may have more incentive to engage in value-enhancing CSR when there is a downturn; on the other
hand, during a booming period, a CEO is less likely to commit to CSR engagement, since the firm’s
market value is already high.
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Table 6.Second-stage 2SLS results of Impact of REHAB on lnTobin’s Q (Sub-period results)
Dependent Variable: lnTobin’s Q
Boom period
Cooling-off period
(2003 – 2008)
(2009- 2012)
REHAB
0.004
0.002
(0.003)
(0.001)**
TENURE
-0.024
0.076
(0.025))
(0.059)
DELTA
30.189
42.118
(29.010)
(39.479)
VEGA
-41.084
-53.483
(40.010)
(21.583)
CASH
-0.845
0.486
(0.817)
(0.623)
lnLEVERAGE
0.131
0.095
(0.120)
(0.072)
lnSALES
-0.038
-0.576
(0.035))
(0.505))
AGE
0.000
-0.295
(0.015)
(0.190)
INSIDER
0.176
2.248
(0.453)
(1.745)
DERIVATIVE
-0.001
0.313
(0.018)
(0.261)
YEAR
Yes
Yes
CEO_CHANGE
Yes
Yes
Partial F-statistic
4.55(p-value = 0.000)
3.99 (p-value = 0.000)
Hausman test (p-value)
0.000
0.000
Rho
0.48
0.96
R2 (within)
0.49
0.93
N
260
90
Note: The parameter estimates are shown first and standard errors are in parentheses. *, ** and
*** denote significant at 10%, 5% and 1% respectively.
4.3. Further Robustness Checks
We ran alternative specification tests to address the issue of model mis-specification as a result of
omitted variables or the choice of our 2SLS instruments. First, to account for the curvilinear
relationship between delta and Tobin’s Q(Bulan et al. 2010), we ran the regressionswith an
additional specification: squared form of delta (
). Second, we use firms’ yearly share return
as an alternative measure for firms’ financial performance. The signs and the significance of the
parameter estimates of REHAB and CEO tenure were unchanged2.
5. Conclusions
Without taking into account the moderating effects of CEO entrenchment and industry
cycle,empirical studies may have difficulty presenting convincing results concerningteCSR-CFP
2
The results are available upon request
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relationship. Based on the panel data set of the 40 largest Australian-listed M&M firms for 2003 to
2012, we finda positive CSR-CFP association. This supports our hypothesis(1)that CEO tenure
decreases the firms’ financial performance. To enhance our understanding of CEO entrenchment
and CSR-CFP association, we examine how the CSR-CFP association changes in two sub-samples:
CEOs with tenure below the median tenure and CEOs with tenure including and above and the
median tenure. We findevidence in favour of our hypothesis (2): a positive CSR-CFP association
holds only in the ‘less-seasoned-CEO’ CEO group.Overall, our findings are consistent with the CEO
entrenchment hypothesis: more seasoned CEOs are more likely to be entrenched and to influence
the board of directors to introduce risk-decreasing corporate policies (such as high-delta or
high-cash compensation plans); subsequently, the positive CSR-CFP association is destroyed.
Further, our sub-period results support our hypothesis (3): CSR engagement level is more likely to
have a positive impact on CFP in the non-booming period.
Our results have the following policy implications: first, corporate governance mechanisms (such as
board monitoring of CEOs)fail in firms with long-tenuredCEOs. Because of this failed board
monitoring,firms’shareholders will not benefit from an increased level of CSR engagement. Second,
seasoned CEOs prefer risk averse high-delta or high-cash compensation plans; in order to reduce
the risk aversion effect,the board of directors may increase the CEOs’ option-based compensation
to increase the risk-increasing incentive vega.Third, CSR engagement should be provided with more
appropriate incentive. The existing incentive is related to industry cycle. Ideally, CEOs should engage
in value-enhancing CSR no matter in a booming or a non-booming market.
Further, we find evidence that CSR engagement increases a firm’s financial performance; hence the
Australian federal government should communicate the benefits of CSR engagement to the M&M
industry and provide M&M firms with more incentives (such as tax cuts or subsidies) for more
commitment to site rehabilitation activities in order to improve shareholder value.
Acknowledgements
We thank Tom Smith (University of Queensland), Ron Masulis (University of New South Wales),
Glenn Boyle (University of Canterbury) and the 4th Financial Markets and Corporate Governance
PhD Symposium (Victoria University of Wellington 2013) for their comments and suggestions. We
thank Lisi Ma for data collection.
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Appendix A Estimating the Fair Price of a CEO’s Option Portfolio, Delta and Vega
Consistent with previous studies (Coles et al. 2006; Dong et al., 2010), we use the Merton (1973)
modified Black-Scholes (BS) formula to value a CEO’s newly granted option at year t:
Vt= S
N(Z)−
− √
(A1)
Delta per option (DELt) in our study is defined as the change in the dollar value of a CEO’s option
granted at year t for a 1% change in share price. Dollar delta is equal to delta per option times the
number of share options granted. A CEO’s portfolio dollar delta at the end of each year is equal to
the weighted average of all dollar deltas in the CEO’s option portfolio. Following Core and Guay
(2002), we use the following formula to obtain DEL:
DELt= V/
S =0.01
N (Z) S
(A2)
Vega per option (VEGt) is defined as the change in the dollar value of a CEO’s option granted at year
t for a 1% change in share return volatility. Dollar vega is equal to vega per option times the
number of share options granted. A CEO’s portfolio dollar vega at the end of each year is equal to
the weighted average of all dollar vegas in the CEO’s option portfolio. Similarly, following Core and
Guay (2002), we use the following formula to value VEG:
VEGt = V/
= 0.01
N' (Z) S√
(A3)
Where Z = (ln
+ ( − + ))/ σ√ in Equations (A1) to (A3). N(Z) is the normal cumulative
probability function, we use the EXCEL command NORMSDIST(Z) to return the normal cumulative
probability. N'(Z) is the normal probability density function: ( )=
√
.
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Table A1 presents the definitions of the variables used in equations (A1) to (A3).
Table A1. Variable Definitions for Equations (A1) to (A3).
Variable
Definition
d
ln (1+ the expected dividend rate).
DELt
Delta per option granted at year t.
DELt_vested
Delta per vested option at year t.
DELt_unvested
Delta per vested option at year t.
r
ln (1+ the risk-free interest rate).
S
Price of the underlying share on 30th June each year.
σ
Annualised standard deviation of logarithmic daily return.
T
Time to maturity of the option.
Tvested
Time to maturity of the vested option.
Tunvested
Time to maturity of the unvested option.
Vt
Fair price of an option granted at year t.
Vt_vested
Fair price of a vested option at year t.
Vt_unvested
Fair price of a unvested option at year t.
VEGt
Vega per option granted at year t.
VEGt_vested
Vega per vested option at year t.
VEGt_unvested
Vega per unvested option at year t.
X
Strike price of the option.
We use Acrux Ltd (ASX: ACR) as an example in Table A2 to illustrate how we compute the portfolio
value of a CEO’s options, deltas and vegas3. In our calculation, we use the Reserve Bank of Australia
(RBA) zero coupon bond yields with the same maturity as the options to estimate the risk-free
interest rates. The expected dividend rate is the dividends paid per share divided by the year-end
closing share price.
Table A2. Example of calculations for the portfolio value of a CEO’s options, deltas and vegas.
Variable
2003
2004
2005
Option
Options
Options
portfolio
granted
granted in at the end
in 2003
2005
of 2005
(1)
(2)
(3)
(4)
(5)
(1) d
0
0
0
0
(2) r
0.0537
0.0542
0.0511
0.0511
(3) No. of options granted
8,612,178
3,528,0864
(4)
4,306,08 6,459,13
No. of options vested
2,153,045 9
4
882,2225
(5)
4,306,08 2,153,04
No. of options unvested
6,459,133 9
5
2,645,864
(6) No. of outstanding of
8,612,178 8,612,17
12,140,26
3
Acrux 2005 Annual Report, available from
http://www.acrux.com.au/irm/content/financial-reports1.aspx?RID=306, accessed 26/05/2012.
4
3,528,086 options were granted on 28 Sep, 2004 to CEO Igor Gonda’s. Detailed options information can be
found at ‘Share options’ section in Directors’ Report. Page 30 of the Acrux 2005 Annual Report.
5
25% of options become vested on each of 6, 12, 18, and 24 months after the grant date.Note to ‘Share
Options’, Page 30 of the Acrux 2005 Annual Report.
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options
8
S
0.32
0.35
0.5
0.5
Tvested
7
6
5
7
Tunvested
9
8
7
9
X
0.85
0.85
0.85
0.75
σ
0.5289
0.5106
0.5165
0.5165
Vt_vested
0.1186
0.1119
0.1802
0.2468
Vt_unvested
0.1487
0.1468
0.2318
0.2867
DELt_vested
0.0019
0.0020
0.0032
0.0037
DELt_unvested
0.0022
0.0023
0.0036
0.0040
VEGt_vested
0.0033
0.0034
0.0036
0.0042
VEGt_unvested
0.0034
0.0036
0.0043
0.0043
Weights of year 2003
options
(19) Weights of year 2005
options
(20) Weights of vested options
0.25
0.5
0.75
0.25
(21) Weights of unvested
options
0.75
0.5
0.25
0.75
(22) Value per option portfolio
0.1367
0.1294
0.1931
0.2767
(23) Delta per option portfolio
0.0029
0.0022
0.0033
0.0039
(24) Vega per option portfolio
0.0033
0.0035
0.0038
0.0043
All variables are defined in Table A.1. Source: Acrux 2003 and 2005 Annual Report.
4
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
0.70946
0.29067
0.2174
0.0035
0.0039
In column 1, Table A2, we observe from the 2003 annual report that, in September 2002, the CEO
was granted 8,612,178 options with an exercise price (X) of 0.85, a term to maturity (T) of 7 years.
The market price is 0.32 at the end of the year; hence, S/X = 0.3765. The volatility of share return
(σ) is 0.5289, and the risk-free rate of interest is 0.0552 (r = 0.0537). We use the year-end dividend
rate as the expected dividend for the next year, in this case, the expected dividend pay-out rate is 0
(from the annual financial report, we observe that there was no cash dividend paid to shareholders
for ACR Ltd for any given year for the 2003-2012 period; hence, d = 0).
Because 25% of options become vested on each of 6, 12, 18, and 24 months after the grant date
reported in the 2005 annual report, we multiply 8,612,178 options by 25%8, which results in
2,153,045 (row 4, column 1) vested and 6,459,133 (row 5, column 1) unvested options at the end
of 2003.
Based on the above information, for vested options, Z = (ln
+ ( −
Z − σ√T = 0.1294, N(Z) = 0.6066, N(Z − σ√T) = 0.1294, N' (Z) =
+
))/σ√ = 0.2703,
.
√ π
e
=0.3846.
Next, we calculate the fair price, delta and vega per vested option.V2003_vested in Equation
×
(A1)= 0.32 × e × × 0.6066 − 0.85 × e .
× 0.1294 = 0.1186 (row 12, column 1).
DEL2003_vested in Equation (A2)= 0.01×e
6
×
×0.6066× 0.32 = 0.0019 (row 14, column 1).
0.7094= 8,612,178(No of grants in 2003)/12,140,264(Total options outstanding in 2005).
0.2906= 3,528,086(No of grants in 2005)/12,140,264(Total options outstanding in 2005).
8
To be exact, at 30 June 2003, 9 months have passed from September 2002. However, we still use 25% to
estimate the proportion of vested options.
7
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
VEG2003_vested in Equation (A3) = 0.01 ×e
×
×0.3846×0.32 ×√7 = 0.0033 (row 16, column 1).
For 6,459,133 unvested options at the end of 2003, we add two years to 7, the time to expiration
for vested options. Other inputs are the same as the vested options. Omitting the calculations, we
have V2003_unvested= 0.1487 (row 13, column 1), DEL2003_unvested= 0.0022(row 15, column 1) and
VEG2003_unvested = 0.0034 (row 17, column 1).
Because the CEO has no options granted before 2003, the 8,612,178 options granted in 2003 are
the outstanding amount of the CEO’s options. Further, because the CEO has both vested and
unvested options, we have to calculate the weighted average value of vested and non-vested
options to obtain the fair price, delta and vega per CEO option portfolio.
Weighted average fair price per option portfolio = 0.25 × 0.1186 − 0.75 × 0.1487 = 0.1367.
Weighted average delta per option portfolio = 0.25 × 0.0019 − 0.75 × 0.0022 = 0.0029.
Weighted average vega per option portfolio =0.25 × 0.0033 − 0.75 × 0.0034 = 0.0033.
There were no new options granted in 2004. Hence, the outstanding option balance at the end of
2004, for the same CEO, is equal to 8,612,178 (which is the 2003 ending option balance), in column
2, Table A2. After applying the inputs in the year 2004 and calculating the weighted average of
vested and unvested options, we have the fair price per option portfolio equal to 0.1294 (row 22,
column 2), delta per option portfolio equal to 0.0022 (row 23, column 2) and vega per option
portfolio equal to 0.0035 (row 24, column 2).
Next, in column 3, we calculate the option portfolio fair price, delta and vega of the 2003 grant at
the end of 2005 (from the ‘Share Options’ section of the directors’ report in 2005, we found that
8,612,178 options granted in 2003 have not been exercised at the end of the financial year 2005):
weighted average fair price per option portfolio = 0.1931 (row 22, column 3), weighted average
delta per option portfolio = 0.0033 (row 23, column 3) and weighted average vega per option
portfolio = 0.0038 (row 24, column 3) (those option portfolio values are the weighted average
values of vested and unvested options as well; details of calculations are omitted).
We also observe from the 2005 annual report, that in 2005 (column 4), the same CEO received
another option award of 3,528,086 options with X equal to 0.75, T is 7 years for the vested options;
9 for the unvested options, S is 0.5 at the end of the year, S/X = 0.6667, σ is 0.5165, r = 0.0511 and
d= 0. Thus, the CEO has an outstanding option portfolio of 12,140,264 options (8,612,178 options
granted in 2003 plus the newly granted 3,528,086 options in 2005).
Next, we calculate the weighted average fair price, delta and vega per option portfolio of the newly
issued 3,528,086 options in 2005 (again, 25% of the newly issued is vested and the rest is
unvested). Omitting the detailed calculations, we obtained weighted average fair price per option
portfolio = 0.2767 (row 22, column 3), weighted average delta per option portfolio = 0.0039 (row
23, column 4) and weighted average vega per option portfolio = 0.0043 (row 24, column 4).
Finally, because the fair price, delta and vega per option portfolio at the end of year 2005 are the
weighted average of the current fair prices, deltas and vegas of the two grants (remaining
8,612,178 options granted in 2003 and the 3,528,086 options granted in 2005), we have the
following computation in column 5:
Proceedings of 9th Asia-Pacific Business Research Conference
5 - 6 November 2015, Bayview Hotel, Singapore, ISBN: 978-1-922069-87-0
The weighted average fair price per option portfolio = 0.1931 × (8,612,178/12,140,264) + 0.2767
× (3,528,086/12,140,264) = 0.2174 (row 22, column 5).
The weighted average delta per option portfolio = 0.0033 × (8,612,178/12,140,264) + 0.0039 ×
(3,528,086/12,140,264) = 0.0035 (row 23, column 5).
The weighted average vega per option portfolio = 0.0038 × (8,612,178/12,140,264) + 0.0043 ×
(3,528,086/12,140,264) = 0.0039 (row 24, column 5).
Hence, at the end of year 2005, the total dollar value for delta is 0.0035 ×12,140,264 = $42,
364.924and the total dollar value for vega is 0.0039 ×12,140,264 = $47,206.63.