The State As The Controlling Shareholder,Government Intervention And Stock Incentive

In 2006,"the Administrative Measures on Stock Incentives by Listed Companies(Provisional)" and "the Provisional Measures for Implementing Stock Incentive of State Holding Listed Companies(Domestic)" was issued,which is another major step of executive compensation system reform in China's state-owned enterprises since the annual salary system reform process.The Stock Incentive reform is viewed by the parties as a important move to improve company incentives and corporate value because executives of state holding listed companies have been insufficient long-term incentive,Also,this stock incentive reform is carried out after Non-tradable Share Reform and is real reform of equity incentive system,therefore,the effect of its implementation concern a lot.Foreign theoretical study and practice shows that the need for equity-based incentives stem from the managers of moral hazard under asymmetric information,and the effectiveness of equity-based incentives depends on supporting and improving of various corporate governance mechanisms and institutional environment.Different from the mature markets of the West,China's securities market is an emerging market in transition economy.The insider control under administrative intervention is the basic governance characteristics of China's state holding listed companies in the transitional economy,which is very different from the mature institutional environment of the United States and other western where the equity incentive is implemented.Insider Control makes the stock incentives to be necessary,however,the stock incentives may be difficult to effectively because of insiders "rent seeking".Government intervention such as the administrative appointment of Chief executives could control the insider control under the imperfect market mechanism,but it would undermine the effectiveness of equity incentives because of diversity of the company's goals.What effect do China-specific governance characteristics of listed companies impact the effectiveness of incentive stock options?How do the government intervention impact the effects of incentive stock options?How to ensure equity incentive mechanism to become a solution to agency problems from the institution,and not become a source of agency problems?All are the important issues which were faced by the regulators,academia and practitioners.Referring to foreign research methods,there is a large literature to test the value effects of stock incentive based on executive ownership,however,few studies concern how the China-specific governance characteristics of listed company,especially the government intervention influence the effectiveness of equity incentive,which just might be the key affect the effectiveness of equity incentive.Using the samples of listed companies which announced equity incentive program during the 2006-2010,this paper investigates the relationship among state control,government intervention and the effectiveness of the equity incentive from the choice of equity incentive plan,the strength of equity incentive and the value effects of equity incentive.In this paper,three methods to measure the degree of government intervention are used.First,according to the data on the degree of regional marketization in China worked out by Fan Gang,Wang Xiaolu and Zhu Hengpeng(2006),the regional government intervention index was built-a method has been widely used in the studies on regional institutional environment of China,and has better explanatory power.Second,"whether to be controlled ultimateiy by the state"and "the proportion of ultimate control by the state" were also used as a proxy for government intervention.This paper finds that:Compared to non-state holding companies,state-owned holding companies do not tend to choose equity incentive,and the stronger the degree of government intervention is,the less likely for state-owned holding company to choose equity incentive plan is.In other words,government intervention affect the motivations for the state-owned holding company to choose stock incentive plan,and the effectiveness of the equity incentive is inhibited to some extent in the initial part.The study also finds that:compared to non-state-owned holding company,state-owned holding company grant less share of equity incentive to its Chief executives,that is,incentive intensity of state-owned holding company is weaker.Moreover,the share of equity incentive which company award to senior management reduce along with the enhancement of the degree of government intervention,which is more prominent in the state-owned holding company.That is to say,the Government intervention not only weaken the wish of the state-owned holding company to select the stock incentive,and also inhibit the intensity for the state-owned holding company to implement equity incentive.In respect of the value effect of the equity incentive,the test results showed that:the companies to implement equity incentive has a higher market value than the companies no to implement equity incentive,but the greater the degree of government intervention is,the smaller the value effect of equity incentive is.Further analysis on samples of state-owned holding company showed that market value of state-owned holding company which implement the stock incentive is higher than that of state-owned holding company which do not implement the stock incentive,however,the greater the degree of government intervention is,the smaller the value effect of equity incentive is.That is,for state-owned holding companies,government intervention weakened the value effect of the implementation of equity incentive.The study results show that government intervention not only influence negatively the motivation for company to choose equity incentive plan,but also will weaken the value effect of equity incentive.This means that,in order to improve the effectiveness of stock incentive,and solve the problem of insufficient long-term incentives of operators in state-owned holding companies,not only various internal corporate governance mechanisms should be improved,but also government governance should be improved,excessive interference of government on the state-owned holding companies should be bound,and the introduction of market-oriented employment mechanism,the reform of the executives government appointment system of state-owned holding company play an extremely important role on the effects of equity incentive.