The Incentive Effects And Capital Market Consequences Of Non-executive Employee Equity Incentives

It is an important task for the CPC central committee and the State Council to improve relevant laws and regulations to encourage firms to implement equity incentive plan.The implementation of this work arrangement is of great significance for promoting the formation of interest community between capital owners and labor owners,improving firm performance,promoting the establishment of innovation incentive mechanism,and protecting the rights and interests of investors.Non-executive employees are the main incentive objects of equity incentive plan.On average,the number of rights granted to non-executive employees accounts for more than 80%.With more and more listed firms implementing equity incentive and related policies strongly support,we take it for granted that equity incentives are effective.However,there is no empirical evidence to answer the question whether employee equity incentive can improve firm performance and innovation in China.Equity incentive enables employees to participate in the capital market and turn them into employee shareholders.Motivated employees actually become minority shareholders of the firm.Based on the conflicts of interests between controlling shareholders and minority shareholders,there may also be a game between employee shareholders and controlling shareholders.In terms of overall ownership,the total equity granted to employees is equivalent to the firm's fifth largest shareholder.Will employee shareholders play a monitoring role like large shareholders?As capital market participants,will employee shareholders affect the capital market?This paper focuses on the economic consequences of employee equity incentive.According to the research idea of direct impact to indirect impact,internal impact to external impact,incentive effect to governance effect,and product market to capital market,the economic consequences are composed of two parts:the incentive effects and capital market economic consequences of non-executive employee equity incentives.First,this paper investigates the incentive effect of employee equity.The primary purpose of employee equity incentive is to improve firm performance and innovation.Therefore,this paper studies the effect of employee equity incentive on firm performance and innovation,and answers the question "whether employee equity incentives are effective in China".Furthermore,it also analyzes how the incentive intensity,incentive way,incentive object,equity distribution,incentive motivation and other equity incentive factors affect the effectiveness of employee incentive plan,in order to figure out how to design a more effective incentive plan.Second,this paper examines the capital market consequences caused by employee equity incentive.Equity incentives turn employees into capital market participants and minority shareholders within the firm.Compared with external minority shareholders,employee shareholders have information advantages and can influence the implementation effect of business decisions.Based on the conflict of interests between controlling shareholders and minority shareholders,will employee shareholders become the internal governance role of the company,thus influencing firm behavior in the capital market?This paper investigates the influence of employee equity incentive on the firm stock price and financing behavior.Overall,this paper has the following findings:First,employee equity incentives can significantly improve firm financial performance.The problem of free riding does not affect the promotion effect of employee equity incentive on firm performance.Employee equity incentive in state-owned enterprises can also improve firm performance.Restricted stock has no better incentive effect than stock option.Increasing incentive intensity per capita is better than increasing the number of motivated employees.Second,equity incentive for core employees can promote firm innovation.Compared with the executive equity incentive,the equity incentive of core employees plays a more significant role in promoting the innovation output.Compared with restricted stock,employee stock option can promote firm innovation more significantly.This promoting effect is more significant in firms with higher financing constraints and employee turnover intention.Third,employee equity incentives can significantly reduce the stock price crash risk,and this reduction is more significant in firms with high degree of earnings management.On the one hand,employee shareholders can increase the information content of stock price and optimize firm information environment.On the other hand,employee equity incentive can improve firm fundamental characteristics and reduce firm operating risk.This lowering effect still exists in state-owned firms.Fourth,employee equity incentive can reduce the cost of equity financing.On the one hand,employee shareholders can play a supervisory role and reduce tunneling behavior of controlling shareholders.On the other hand,employee shareholders can alleviate the information asymmetry between internal and external investors,thus reducing the information search cost of external investors and promoting the role of external investors in supervision.In general,employee equity incentives help to alleviate information asymmetry and internal agency problems,thus reducing the risk premium asked by investors.High-quality employees can play a greater reduction effect.The possible innovations of this paper are as follows:First,this paper examines the economic consequences of employee equity incentive and answers the question of whether employee equity incentive can promote firm performance and innovation in China.Meanwhile,it studies the indirect effect of employee equity incentive on the capital market,which is a supplement to the related research.Second,this paper provide some of the first evidence on the monitoring effect and information effect of employee shareholders.These findings enrich the research on employees' participation in corporate governance and provide references for the protection of minority shareholders.Third,the findings of this paper can provide reference for the regulatory authorities to improve their policies on equity incentive,information disclosure of listed firms and protection of investors' rights and interests.Furthermore,it can provide inspiration for listed firms to make a more effective equity incentive plan.