Research On Earnings Management In Executive Stock Option Plan Of Chinese Listed Companies

Nowadays, the traditional manager compensation system is getting more difficult to adapt to the actual needs of enterprise management. Executive Stock Option Plan (ESOP) is considered to be an effective compensation contract to solve the Agency Problem. However earnings management in listed companies is widespread, which impacts on stock option plan. Since2006, more and more listed companies in China have implemented stock option plan. In order to maximize its incentive effect, it is necessary to study managers’earnings management behavior. This paper studies the characteristics of earnings management in ESOP from two aspects. First, the stock option plan could make earnings management different from that in bonus scheme. Second, the contract elements of stock option plan can also affect earnings management.This paper constructs with six chapters.Chapter1is the introduction which gives the research objectives, research contents, technical route end research methods.Chapter2is literature review on (1) the governance effect of stock option plan,(2) the earnings management and (3) earnings management in the stock option plan.Chapter3is the theoretical basis of this paper. Thirst, discuss the necessity and the method to restrain earnings management. Then, divide the purpose of earnings management into two categories according to the role of accounting information in the ESOP.Chapter4studies on the earnings management for the purpose to maximize the stock option income. I first develop a CEO equity incentive contract model in the presence of earnings management, then present assumptions, and finally come to a conclusion by empirical study.Chapter5studies on the earnings management for the purpose to be qualified to award or exercise. I discuss how contract elements in the the stock option plan affect earnings management with Managerial Power theory. Then I study earnings management in ESOP of Chinese listed company in different stage with Total Accrual Model and Distribution Model.Chapter6is the last chapter which gives conclusions and proposals.The main findings are as follows:Firstly, The earnings management in the ESO is different from that in the bonus scheme in three ways. That is (1) it has pluralism objectives,(2) its objectives will change by stages and (3) it has clear and definit goals in each stage. The ESOP will, to a certain extent, inhibit earnings management behavior.Secondly, the extent of earnings management depends on the managerial power of the company. Different power will lead to different contract elements and consequently different extend of earnings management. The contract elements can be divided into4groups. The first group in turn affects the managerial power, such as vesting object. The second group affects the requirement of earnings management, such as the requirment of performance. The third group affects the benefit which managers can get by managing earnings, including incentive level and exercise price. The last group affects the cost of earnings management, including assessment indicators and effective date. I find that the last group doesn’t affect managers’ decision in Chinese listed company, which means that the marginal cost of earnings management is low because of inefficient mornitoring and punishment.Therefore, I propose the following suggestions:Firstly, managers usually use their power to increase the incentive level during the process of drafting contracts, which consequently increase the extent of earnings management. To avoid this situation worse, a simple and feasible way is to keep the same equivalent utility with original incentive level while Chinese listed company intends to replace the bonus scheme with the equity incentive one. In this way, both parties of the contracts can share the Pareto Efficiency per the original ratio, while managers’ motivation for rent-seeking will not increase.Secondly, the shareholders should contract different SOP with different person in order to avoid weakening the efficiency of corporate governance.Compared to the prior study, the contributions of this paper are as follows:Firstly, this paper makes integrated and systematic research on earnings management in ESOP. This paper studies all the cc itract elements related to earnings management insead of incentive level only. Meanwhile it studies the contract period and the valid period as a whole under the managerial power theory instead of studying separately.Secondly, this paper contributes to Earnings Management Theory and Managerial Power Theory. It divides the purpose of earnings management into two categories according to the role of accounting information in the ESOP. It also constructs the path model that managerial power influences earnings management.