The Benign Construction Of The Incentive And Restrictive Mechanism Of Stock Option

The separation of ownership and the power of control makes it necessary to establish a mechanism to motivate the managers to act as shareholders. Stock option system, which is an innovation mechanism of Silicon Valley, has become popular in European and Asia when it was widely used in American, so it is a worldwide incentive mechanism right now. But with the bankruptcy of Enron, stock option was questioned by more and more people. Today,the stock option system draws the attention of enterprises in China, the author make the suggestion for improvement of this mechanism by reviewing relevant mechanisms as well as legislations in the United States .In this paper, the accounting-law method is used to research the stock options system which is facing problems of financial frauds and establishment of legal regulations .Accounting law ,which is a branch of the economic law and an important component of accounting ,aims at research how to resolve the legal problems in accounting activities by using legal theory and accounting principles. This paper meets the legal requirements in the aspects of presentations, research methods and legal terms, at the same time, it meets the accounting requirements in technical factor. Therefore, the law-accounting method which is the combination of legal theory and accounting technical specifications, is beneficial to analyze the legal and accounting issues of stock option system in an overall way. The present dissertation, with about 37,000 words divided into five chapters.Chapter one makes the definition of the stock option. The author suggests that stock option is an effective incentive mechanism to avoid moral hazards and converse choices and is of importance for modern corporation management.Chapter two analyses the theoretical foundations and legal grounds of stock option system which is based on the economics perspectives. The separation of ownership and controlling interests results in the weakening of their ability to control the company and the increasing interests conflicted between the shareholders and the company managers. In turn, stock option is an effective mechanism for company to handle and maintain the interest balance between shareholders and managers.Chapter three states the logical chain of stock option which is the breakthrough of the traditional incentive plan, and provides an analysis of the positive and negative effect: when the managers hold the stock options, their own interests are closely related to the interests of the company, and the market prices of stock options are also closely related to the management of companies, so stock options are gold cuffs for managers. But stock options are easy to be the force and tools of financial frauds. Meanwhile ,it is also difficult to form a plan in which the award is closely linked to the performance of managers.Chapter Four gives a consideration to the legal and accounting environment of stock option system carried out in China. By amending corporate law, securities law, law of tax, accounting standards and so on, the present legislation has provided room for development of stock option system in China. But in law, the ambiguities need to be clear and definite, and the tax law is lack of incitement; in accounting, the new accounting standards need the support from strong–form efficiency market, and it is an unavoidable problem of maintaining the independence of auditors.Chapter five makes the suggestion for improvements stated in the chapter four. Through the classification of incitements and restrictions, the author show the idea that stock option is a mechanism in which interests and risks had to live side by side, so only complied with the principle of stimulation and restriction, can we construct a perfect stock option system.