The Impacts Of Option Incentive On Corporate Investment Behavior From The Perspectives Of Innovation,m&a And Investment Efficiency

As an important part of executive compensation structure,option incentive is the direct reason for the rapid growth of executive compensation in Europe and the United States since the 1980 s.It is also considered as one of the factors that triggered the 2008 financial crisis.As a developing country in transition,listed companies in China need to establish an effective incentive and restraint mechanism.Since the CSRC first promulgated the "Equity Incentive Management Measures for Listed Companies(Trial Implementation)" at the end of 2005 to the formal promulgation of the "Equity Incentive Management Measures for Listed Companies" in 2016,the enthusiasm of listed companies in China to implement option incentives has been continuously enhanced.With the continuous development of the external market environment and internal operation mechanism,option incentive has become one of the most important tools for listed companies in China.At the same time,how to avoid excessive incentives and restraint imbalances is an important issue faced by entrepreneurs and regulators in China.Therefore,it is of great theoretical and practical significance for the future development of option incentive system in China to evaluate the effect of option incentive on investment behavior of enterprises.The implementation of option incentive will have important impacts on the investment behavior of enterprises.First of all,as an important mechanism to improve corporate governance,option incentives can promote the formation of the common interests between capital owners and workers,and give workers the opportunity to share the future earnings of the company.Secondly,option incentive can arouse the enthusiasm of the incentive targets and restrain the laziness and selfinterest behavior of managers.Furthermore,the convex incentive characteristics of stock options can reduce the risk aversion attitude of managers,enhance the level of corporate risk-taking,and encourage enterprises to engage in more high-risk investment activities.Thirdly,the long-term of option incentive can not only inhibit the short-sighted behavior of managers,enhance their concern for the long-term value of the enterprise,but also maintain a stable workforce and enhance the efficiency of team cooperation.In addition,option incentives can release positive signals to the capital market,provide more information for external investors and creditors,alleviate the financing difficulties caused by information asymmetry,and reduce the financing constraints faced by enterprises.Moreover,the implementation of option incentives has attracted the attention of institutional investors and analysts,which can form a strong external supervision for the company.With China’s economic development entering a "new normal" and the process of promoting economic growth from factor-driven to innovation-driven,it is urgent to strengthen technological renovation and industrial upgrading.Therefore,this paper chooses enterprise innovation,merger and acquisition,and investment efficiency as the research perspective from the influence of option incentive on enterprise investment behavior.First of all,innovation is an important endogenous growth investment activity of enterprises.The 18 th National Congress of the CPC put forward the strategy of innovation-driven development,emphasizing that "scientific and technological innovation must be placed at the core of the overall situation of national development".The strategic policy of "supply-side structural reform" emphasizes the need to improve social productivity through technological innovation in order to better adapt to the structural changes in market demand.Second,M&A is an important external expansion investment activity of enterprises.Under the background of China’s macroeconomic restructuring and industrial transformation and upgrading,mergers and acquisitions are important investment methods for companies to achieve scale expansion and resource integration.Finally,investment efficiency is an important index to measure the effectiveness of enterprise investment.Facing the "new normal" of "adjusting the structure and steady growth",improving the efficiency of investment is the key to play a good role in promoting economic growth.To sum up,this paper takes the option incentive of listed companies in China as the main line of study,with the principal-agent theory as the theoretical basis,in the framework of effective contract theory,combined with convex incentive theory and signal transmission theory,study the impacts of option incentive on enterprise innovation,mergers and acquisitions,and investment efficiency.Based on the data of Chinese listed companies from 2006 to 2016,this paper analyzes the effects of the current option incentive system in China from the perspectives of enterprise innovation,merger and acquisition,and investment efficiency,using the methods of Fixed Effects Model,Propensity Score Matching,Difference-in-Differences and Instrumental Variables.Exploring how option incentive affects enterprise resource allocation is not only a useful expansion of the existing literature,but also a reference for the implementation and development of option incentive system in the future.This dissertation is arranged as follows:First,it begins with an introduction.The introduction describes the background and significance of this topic,introduces the research contents and methods,and points out the innovations of this paper.The main body of this dissertation consists of six chapters.Chapter1 is the theoretical basis and institutional background.This chapter first defines the relevant concepts of option incentive and clarifies the research perspective of this paper.Next,it introduces the main theoretical viewpoints of option incentive,including principal-agent theory,effective contract theory,managerial power theory,convex incentive theory,and signal transmission theory,which shows the theoretical foundation for the hypothesis and empirical tests in the later chapters of this paper.Next,it introduces the development process of option incentive system in China’s capital market,describes the current situation of option incentive system in China,and provides background for the follow-up empirical study.Chapter2 is the related literature review.Firstly,this chapter reviews the relevant literature on the economic consequences of option incentive from the perspective of governance effect,risk incentive effect and financing effect.Furthermore,this chapter reviews the related theory and empirical research of option incentive and enterprise investment behavior from the aspects of enterprise innovation,merger and acquisition,and investment efficiency,and evaluates the achievements and shortcomings of the existing research,highlighting the value of this paper.Chapter3 studies the impact of option incentives on enterprise innovation.This chapter first empirically examines the impact of option incentives on innovation output and input.Furthermore,the paper discusses the positive relationship between option incentive and corporate innovation,which is influenced by the property rights of controlling shareholders,institutional investors(especially fund holding)and the contract characteristics of option incentive.Chapter4 analyzes the impact of option incentives on mergers and acquisitions.This chapter first empirically examines the impact of option incentives on M&A probability and scale of M&A.Next,this chapter introduces managerial characteristics and property rights into the framework of studying how option incentives affect firms’ M&A behavior.Finally,this chapter also examines the performance of option incentives in encouraging M&A.Chapter5 examines the impact of option incentives on corporate investment efficiency.This chapter first empirically examines the impact of option incentives on the overall investment efficiency,underinvestment,and overinvestment.Furthermore,the potential mechanism of option incentives affecting the investment efficiency is investigated from two aspects: improving the risk-taking and alleviating the financing constraints.Finally,this chapter examines the impact of internal ownership structure and external supervision on the incentive effect of options.Chapter6 summarizes the main conclusions and policy implications,points out the limitations and future research directions of this study.The main findings of this dissertation can be summarized as follows:(1)Option incentive is an effective incentive mechanism to promote enterprise innovation.Firstly,compared with the enterprises without option incentive,the enterprises with option incentive have more patent output.Secondly,the effect of option incentive on enterprise innovation is more significant in non-state-owned enterprises.Therefore,the long-term incentive mechanism design for state-owned enterprises’ technological innovation needs further improvement.Thirdly,the effect of option incentive on enterprise innovation is mainly concentrated in the enterprises with higher fund holdings.Therefore,actively promoting the development of institutional investors represented by fund holdings is conducive to the technological progress.Finally,the contractual characteristics will affect the effect of option incentives on enterprise innovation.The longer the exercise period of option and the larger the relative scale of the executive option,the more significant incentive effect of the option is.(2)Option incentive will affect the M&A behavior of enterprises.Compared with the enterprises that do not grant executive option incentive,the enterprises that grant executive option incentive have higher M&A tendency and scale.And the more the number of options granted to executives,the greater the tendency and the scale of M&A.Furthermore,managers’ characteristics and the firms’ property right will affect the effect of option incentive.Specifically,the effect of option incentives on M&A tendencies and scale is more significant in firms with older executives,and in firms’ with longer tenure executives.Besides,the effect of option incentives on M&A tendencies and scale does not exist in enterprises with higher executive relative pay.In addition,the effect of option incentive on the tendency and the scale of M&A is more obvious in non-state-owned enterprises.Finally,option incentives not only enhance the scale of M&A but also enhance the financial performance of M&A.(3)Option incentive restraining the inefficient investment of enterprises.Specifically,the impact of option incentives on the investment efficiency mainly comes from the mitigation of insufficient investment.Firstly,the convex incentive effect of stock option is one of the potential mechanisms that affect the investment efficiency.The inhibiting effect of option incentive on inefficient investment is more significant in enterprises with lower risk-taking level.Secondly,the mitigation of the financing constraints of the stock option is another potential mechanism that the option incentive affects the investment efficiency.The inhibiting effect of option incentive on inefficient investment is more prominent in enterprises with smaller scale and lower fixed asset ratio.In addition,the company’s internal ownership structure will affect the effect of option incentives,one dominant shareholder with the "tunneling" behavior is not conducive to optimize the efficiency of enterprise investment.The inhibiting effect of option incentive on inefficient investment does not exist in the enterprises with higher equity concentration.Finally,more independent directors,more institutional investors,and more analysts can form a strong supervision on listed companies,which is conducive to better play the role of option incentives.The incentive effect of stock option is more prominent in enterprises with more independent directors,more institutional shareholdings and more attention from analysts.The main contributions of this paper are as follows:In terms of research perspectives,first of all,the existing researches rarely study the impacts of China’s current option incentive system on enterprise resource allocation behavior,this paper selects enterprise innovation,M&A and investment efficiency as the research perspective to explore the impacts of the current option incentive system on the investment behavior of listed companies in China,which can supplement the existing researches.Secondly,a large number of existing researches about Chinese enterprises’ innovation ignored the innovation output represented by the patent licensing.Considering the heterogeneity effects of property rights,institutional shareholders and option contract characteristics,this paper deeply analyzes the impacts of option incentives on the patent output of enterprises,which is a new attempt.Thirdly,the existing literature pays less attention to the incentive effects of the option granted to executives when examining the influencing factors of M&A.Considering the heterogeneity effects of executives characteristics and property rights,this paper reveals the effects of option incentive on M&A decision.In addition,most of the existing studies examine the risk promotion effect of option incentive,while ignoring the financing effect of option incentive.This paper examines the potential mechanism of option incentive affecting the investment efficiency from two aspects: enhancing risk-taking and alleviating financing constraints,which provides a new perspective for understanding the incentive effect of option contracts.Finally,different from previous studies,this paper examines the impacts of internal ownership structure and external supervision on the effects of option incentive to enhance investment efficiency.In terms of research methods,this paper uses panel data,the overall sample interval covers from 2006 to 2016,the long research interval and the big research samples can generate abundant results,enhance the credibility of the conclusions.According to the needs of different research questions,this paper uses a variety of econometric research methods to ensure the robustness of the results.Firstly,in order to alleviate the interference of time-independent factors on the regression results,the Fixed Effects Model is used to estimate the regression coefficients.Secondly,in order to reduce the impact of data bias and confounding variables,the Propensity Score Matching method is used to mitigate the measurement errors caused by the unobservable heterogeneity between firms with option incentive and firms without option incentives.Thirdly,in order to accurately estimate the intertemporal effect of the option incentive,the Difference-in-Differences method is used to estimate the treatment effect.In addition,the Instrumental Variable method is used to verify the unbiasedness and robustness of the regression results.To sum up,this dissertation enriches and expands the relevant researches regarding the impacts of option incentive on enterprise resource allocation,provides useful empirical evidence for market investors,corporate decision-makers and government policymakers,which is very important in improving the incentive mechanism and understanding corporate investment behavior.