Executive Equity Incentive Contract、Controlling Shareholder’s Share Pledging And Dynamic Adjustment Of Capital Structure

Since the proposal of MM theorem by Modigliani and Miller in 1958,capital structure theory has experienced decades of development,including several theoretical branches,such as Trade-off Theory,Agency Cost Theory,Pecking Order Theory,and Market Timing Theory.Scholars at home and abroad have explored many theoretical and practical issues concerning corporate capital structure like the selection,rule of change and influencing factors from different perspectives.Among those perspectives,dynamic Trade-off Theory has been recognized and supported by many scholars in recent years,and has gradually become the mainstream logic of capital structure research frame.The dynamic Trade-off Theory holds that the firm has an optimal capital structure,reflecting the best matching of corporate value and risk,as well as indicating the external manifestation of value maximization.When capital structure deviates from the optimal value,the firm has the motivation to adjust the capital structure to the optimal value,but only partial adjustment can be made due to the existence of the adjustment cost.Therefore,scholars empirically investigate the impact of firm internal characteristics and external macro-environmental factors on the dynamic adjustment of capital structure.However,these studies pay less attention to the agency conflict problems between shareholders and managers,as well as between controlling shareholders and minority shareholders,ignoring the impact of agency conflicts on the dynamic adjustment of capital structure.The separation of management rights and ownership leads to a lack of motivation for managers to adjust the actual capital structure towards the target level.Compared with the restraint mechanism,the incentive mechanism can better stimulate the potential of managers,and urge them to actively adjust the capital structure.Unlike salary incentives,the equity incentive contract mechanism has the "golden handcuffs" function,which can bind the interests of shareholders and managers for a long time.This article examines how the existence of equity incentive contracts and specific contract terms affect the dynamic adjustment of the capital structure.In the context of ownership concentration,the appropriation of interests of controlling shareholders will distort capital structure decisions.Some scholars have indirectly measured from the perspective of a listed company how the interests of controlling shareholders affect the dynamic adjustment of the capital structure.However,the controlling shareholder’s share pledging can directly measure its motivation for tunnelling and the transfer of defense control risk.From the perspective of share pledging,this paper explores the influence of controlling shareholders’ self-interest motive on the dynamic adjustment of the company’s capital structure.The two types of principal-agent problems coexist in the company’s management practices.Under the combined effect of the dual principal-agent conflict,the controlling shareholder with controlling power is not only satisfied with maximizing the value of the company,but also engages in activities such as tunnelling or defending against the risk of control transfer,which affects the effect of executive equity incentives.Issues related to the dynamic adjustment of capital structure will become more complicated under the dual principal-agent framework.This paper uses the sample data from China’s Shanghai and Shenzhen A-share listed companies to empirically explore the impact of executive equity incentive contracts,controlling shareholder’s share pledging and the interaction of the two on the dynamic adjustment of capital structure.This paper consists of seven chapters.Chapterl is the introduction.This chapter mainly illustrates the research questions and research significance,and defines key concepts,then summarizes the research ideas,research methods,research contents and innovations of this paper;Chapter 2 encompasses basic theories and relevant literature review.Basic theories include the Modern Capital Structure Theory,Agency Cost Theory and Incentive Theory.Research on the influencing factors of the dynamic adjustment of capital structure and on the controlling shareholders’ share pledging is then reviewed;Chapter 3 presents the basic status of the capital structure adjustment of listed firms in China.Chapter 4 studies the relationship between executive equity incentive contracts and dynamic adjustment of capital structure based on agent conflicts between shareholders and managers.Chapter 5 is based on the existence of agency conflicts between controlling shareholders and minority shareholders,and discusses the impact of controlling shareholder’s share pledging on the dynamic adjustment of capital structure.Chapter 6 is based on the perspective of dual agent conflict,combining the controlling shareholder’s share pledging and the executive equity incentive contract to test the impact of the interaction of the two on dynamic adjustment of the capital structure.Chapter 7 summarizes the conclusions of the thesis,and proposes corresponding policy implications,and finally introduces the research prospects and limitations.The main research conclusions of this paper are as follows:(1)The implementation of equity incentive contracts has fully stimulated the willingness of executives to adjust their capital structure,and has significantly promoted the adjustment of the capital structure of listed companies in China.In light of terms of the contract,higher exercise conditions,longer validity period,greater proportion of equity awards and stronger binding of restricted stocks,will accelerate managers to adjust capital structure to the target level.The mechanism of such promotion effects mainly depends on the way of increasing borrowing and debt repayment,instead of the issuance of stocks and cash dividends.Further research finds that:first,the executive equity incentive contract can speed up the upward adjustment and downward adjustment of the capital structure,which can reduce the asymmetry of capital structure adjustment;second,significantly positive impact of the executive equity incentive contract on the speed of capital structure adjustment is found in non-state-owned enterprises,instead of state-owned enterprises.(2)The risky behavior of the controlling shareholder’s share pledging enables the potential capital supplier to ask for a higher risk premium,which increases the cost of capital structure adjustment and lowers the adjustment speed.The negative impact of the controlling shareholder’s share pledging on the dynamic adjustment of the capital structure is mainly caused by the company’s increase in borrowing,stock issuance and debt repayment adjustment,rather than by cash dividends.Further research shows that:first,the controlling shareholder’s share pledging will slow down the upward adjustment and downward adjustment of the capital structure,resulting in an increase in the degree of asymmetry in capital structure adjustment;second,the control transfer risk of controlling shareholder’s share pledging in non-state-owned enterprises is larger,and the negative impact on the dynamic adjustment of capital structure is more serious,compared with those in state-owned enterprises.(3)The interaction of the two will reduce the adjustment speed from present capital structure to optimal capital structure in that during the period of share pledging,controlling shareholders aiming to obtain the support from the executives for their risky behavior are unlikely to exercise effective supervision and management in the process of implementing equity incentive,which will weaken the effectiveness of the equity incentive contract.Further research shows that:first,the internal equity balance mechanism of the enterprise can’t restrain the negative influence of interaction of the two on the adjustment speed of the capital structure;second,the external media supervision mechanism can restrain the opportunistic behavior of the controlling shareholder and the executive due to the dissemination and exposure of information.Thus,double agency conflicts are alleviated,and the negative impact of the interaction of the two on the dynamic adjustment of the capital structure is weakened.This study identifies executive equity contracts as one of the effebctive mechanisms to reduce the agency conflict between shareholders and managers,which is instrumental in promoting capital structure adjustment.Based on share pledging,this paper empirically examines the effect of share pledging and the interaction effect of share pledging and executive equity contracts on the dynamic adjustment of capital structure,and considers the agency conflict between the controlling shareholder and minority shareholder as well as dual agency conflicts under the framework of the dynamic Trade-off Theory model.The conclusion deepens the research on the effect of agency conflict on the dynamic adjustment of capital structure,and presents certain theoretical contributions and practical value.