We propose an asset pricing model in a production economy where cash flows are determined by firms' optimal dividend and investment decisions. Extensive and intensive decision margins in dividend payout are modeled with cash holding and investment adjustment costs. The model implies that delays in dividend distribution of young and growing firms play instrumental roles in explaining various asset pricing anomalies. Quantitative results show that model-implied dividend policies and investments are consistent with data, and the cross sections of stock returns are well explained by the interactions between productivity shocks and the lumpy dividend policies. Additionally, the model produces countercyclical variations in the market risk premium. In addition, we empirically investigate the relevance of firm characteristics and aggregate productivity shocks in determining dividend payment propensity, thereby asset prices. It is found that excess returns for dividend payers over nonpayers are significantly linked to business cycles. Relative future returns are fairly predicted by the spread of lagged propensities to pay dividends. Furthermore, the empirical results document that each future return of payers and nonpayers increases in propensities to pay out cash to shareholders. These results are consistent to our rational expectations model of dividend policy, and contradictory to the catering theory of dividends.

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The significance of stock options as a component of executive compensation has fluctuated dramatically over the past decade. The purpose of this study is to investigate determinants of the effectiveness of stock option grants. These option grants are considered to be effective if they accomplish their intended role of enhancing firm value by inducing risk-taking behavior. Using data from 2,349 firms that granted stock options to their Chief Executive Officer (CEO) between 1992 and 2001, the relationship between the options granted and subsequent firm value was examined. This study found no universal positive association between option grants and firm value. However, CEO incentive equilibrium, defined as stability in the CEO’s stock and option portfolio sensitivity to stock price, was found to influence the association between stock option grants and firm value. The positive association between grants and firm value was evidenced for the sub-sample of firms that demonstrate disequilibrium in CEO incentives. This was not the case, however, for the CEO incentive equilibrium sub-sample. This finding indicates that the positive valuation impact of stock option grants is highest for those firms that demonstrate a trend of increasing CEO portfolio sensitivity to stock price. High CEO portfolio sensitivity to equity risk was not found to interact with grant sensitivity to equity risk in a manner that reduces firm value. Thus, this study did not find support for the hypothesis that, ceteris paribus, grants further reduce CEO diversification, and interact with portfolio sensitivity to reduce incentives for risk-taking. Consistent with Lambert, Larcker and Verrecchia (1991), however, a high level of uncorrelated wealth is found to interact with grant sensitivity to equity risk so as to increase the positive impact of grant sensitivity on firm value.

Executive Stock Option (ESOs) is the most prevailing encouragement system in the United States. Until the amended Securities Law £i28-¢º and III in July, 2000, the most popular encouragement system in Taiwan is Employee Stock Bonus (ESBs). After introducing the ESOs in 2000, Vanguard International Semiconductor Corporation (VIS) is the first company to implement the ESOs in February, 2001. Taiwan¡¦s Companies start to implement the ESOs one after another after VIS¡¦s adoption. ESOs are an encouragement system for companies. However, the company management might use earnings management on account of self-interests to increase the value of stock options they owned. The issuance of ESOs can¡¦t increase the profit of the corporate in this situation. On the contrary, it becomes a motivation of the management to manipulate the earnings. This research is about three topics between ESOs and earnings management and the targets are the Taiwan listed electronic companies from year 2001 to year 2005. This study is mainly about three issues of the relations about ESOs and Earnings Management in Taiwan listed companies in the time between 2001 and 2005. First, if companies that grant ESOs would come up more earnings management over time in the lock-up period. Second, if companies that grant ESOs would come up more earnings management than those that don¡¦t grant ESOs when the lock-up period ends. Finally, this study is about the relations between the volume of ESOs and the earnings management. The experiment findings conclude that companies that issue ESOs have the lowest earnings management level at the year of issuance and the highest level at the year of the end of the lock-up period. Comparing with the companies that don¡¦t issue ESOs, companies that issue ESOs have higher earnings management level. Finally, this study concludes that the amount of the ESOs doesn¡¦t affect the earnings management significantly.

The relationship between the stock markets of the developed countries has been examined extensively in the literature. This paper examine the dynamic relationship between India and the major developed markets including USA, UK and Japan .Using daily stock market data from January 1997 to December 2002 and from January 2003 to December 2007,the study examine the stock price indices of India (BSE SENSEX), USA (Dow Jones Industrial Average), UK(FTSE-100) and Japan (Nikkei 225). The ordinary least square method is showing some relationship between the stock markets. A multiple equation series known as a vector autoregression is proposed for describing the dynamic behavior of the four stock markets. The result shows that the markets are interrelated at significant level and influences each other. All the markets influence India but recently the influence of USA market is comparatively high than other developed markets.