Research On The Incentive Stock Option Base On Ultimate Ownership Structure

The object of the study is the incentive stock options (ISOs) in Chinese securities market. Based on the summary of the foreign hypothesis about incentive stock Options, we research the stock price effect and the financial performance caused by the executive of the incentive stock options plans. Moreover we discuss some questions about the incentive stock options from the perspective of the ultimate ownership structure.It makes a statistic of the ultimate control rights structure for Chinese listing corporation in 2011. The research finds that the ultimate controlling shareholders have average controlling rights 38.93%, cash flow 33.67%, the separation of ownership and control 5.16%, Control leverage ratio 1.16.The serperation is more significant in private enterprises, but its mean is less than other type of controller’s.From the statistical analysis of the Chinese listed company incentive stock options proposed and implemented equity incentive between 2006 and 2012, we find that the majority of the company are high-tech companies (such as the IT industry, pharmaceuticals, biological products, petroleum, chemical etc.) or in the rapid growth industry (real estate).The incentive stock options has become a routine tool to incentive manager in listing corporation, especially in the companies listed on GEM(Growth Enterprises Market),29.43% of the companies put forward incentive stock options plans and 19.71% of the companies implement incentive schemes, which two proportions were higher than the proportion of motherboards and small plates scale.By the following aspects, the paper makes some empirical researches in detail about the Incentive effect and the relationship between the Incentive effect and the ultimate ownership structure:(1) From two aspects of stock prices and financial indicators, we examined the incentive effect of the incentive stock options in China. Studies show that the implementation of incentive programs has positive incentive effects:the underlying stocks have significantly positive BHAR (Buy and Hold Abnormal Return) after executive date. The incentive stock options stimulate the company’s profit growth, but this growth is peak in the year of implementation and declining after. After the implementation, the size of the company prioritizes growth over profit growth, while the company’s financial risk becomes higher.(2)The relationship between ultimate ownership structure and equity incentive were analyzed. Studies show that ultimate ownership structures will affect the incentive plan design. Increase in the proportion of control will make the exercise rights vesting performance requirement ratios and the options executive price become stricter. This shows that the controlling shareholders of listed companies want to minimize the cost (dilution) to maximize its value. The separation ratio and control right ratio greater and the higher the exercise price, the performance requirement ratios lower. Cash flow rights down to increase the shareholder bargaining power and controlling shareholder’s behavior is restrained. In the equity incentive conditions, the two will form a mutual supervision environment.(3)It discusses the relationship of the incentive effect and ultimate ownership structure or the exercise conditions. Research shows that the ultimate ownership structure has not significant relation with incentive stock options. Although the ultimate ownership structure can effect incentive plans designs, but this effect can not passed directly to incentive effects. Although studies have shown a higher financial performance vesting conditions will lead to higher short-term wealth effect (Xie Deren and Chenyun Sen,2010), but for the long term, this relationship does not exist. Price Vesting conditions and incentive effect exists a concave quadratic relation. When the exercise price equal to the market price, the incentive effect is the lowest, which reflects the setting on the exercise price of China’s laws and regulations may be invalid. PE and long-term financial performance and stock price effects are significant negative correlation. When managers choose to implement incentive plan at a low PE ratio, the incentive effects will be higher, which timing behavior will obviously bring higher incentive incomes, but no association management efforts. The financial performance has a significant positive relation with the separation (with control rights minus cash flow rights divided by control rights),which Indicates that the company managers and controlling shareholders tend to be consistent, then the controlling shareholders violations will be restricted, therefore, reduce the harm to the listing Corporation. Studies also show that the incentive effects do not significantly different between state-owned and private holdings companies.This paper draws many conclusions which advantage to the investors and the public companies. From a regulatory perspective, it makes a good use of incentive stock options plans to promote the company to eliminate it becoming a company executes welfare measure. Look from the conclusions of this study, management may come through the timing of the incentive for higher income, so how to curb such speculative behavior should to be considered. From the design of incentive plans, sound financial performance vesting conditions and the options exercise price are important Indexes. The options exercise price is set according to the prevailing market price is not the best.