The Corporate Governance Effect Of Managerial Stock Incentives: An Empirical Analysis Based On Earnings Management And Firm Performance

Managerial stock incentives, an important incentives mechanism, can align managers and outside stockholders, and help firms resolve the agency problem. Analyzing the corporate governance of managerial stock incentives, not only can impove the stock incentives'mechanism, but also can assess the state enterprise reform in China. This paper uses the sample of 1336-1573 firms in 2005-2008, and examine the corporate governance effect of managerial stock incentives from the perspective of earnings management and firm performance.First, this paper analyzes the influence of CEO stock incentives on earnings management. The paper finds that CEO stock incentives, as measured by the percentage of shares and options in total CEO compensations, are negatively related to earnings management for publicly listed firms which have not declare CEO stock incentive plans. This negative relationship becomes statistically insignificant for firms which have either formally announced or approved CEO stock incentives plans. In addition, there is strong evidence that earnings management is positively related to the probability of stock options exercises by the CEOs. Moreover, industry-adjusted ROA significantly declines after CEO exercises her stock options.Second, under accounting for earnings management, this paper uses Heckman two-step model to examine the relation between CEO stock incentives and firm performance, and the interaction between CEO stock incentives and state-owned holding. The paper finds that before accounting for earnings management, CEO stock incentives are positively related to corporate performance. After accounting for earnings management, the impact of incentive-based compensation on corporate performance drop. This paper examines also examines the cross-action between State-owned holding and CEO stock incentives. The paper finds that before accounting for earnings management, the cross-action is not statistically insignificant. However, after accounting for earnings management, the negative cross-action is statistically significant.Final, this paper compares the corporate governance effect of CFO stock incentives with that of CEO stock incentives. The paper finds that the positive affect of CEO stock incentives on earning management is bigger than that of CFO stock incentives in the firms with formal CEO stock incentives plans. In addition, after accounting for earnings management, the affect of CEO stock incentives on firm performance is stronger than that of CFO stock incentives.These findings in this paper indicate as follows. First, formal stock incentive plan are encourage earnings management, and the others restrain it. Second, stock incentives help to heighten firm performance, and state-owned holding can dramatically weaken the positive corporate governance effect of stock incentives. Third, the corporate governance effect of CEO stock incentives is stronger than that of CFO stock incentives. Finally, both earnings management and the nature of property right can prominently influence the relation between managerial stock incentives and firm performance.