Research On The Relationship Between Executive Stock Option And Earning Management

Executive Stock Option originated in the United States in 1950s, and then spread to the Western countries, where it is widely recognized and has been widely used as the best solution to the problem of the principles-agent for modern companies, and many large companies have introduced and implemented this system, until the early 21st century, a series of financial scandals for some US companies like Enron broke. Their senior executives were found guilty of financial situation of fraud, raising the price of company stocks with an empty boast, seizing illegal profit by taking advantage of Stock Option, etc. From then on, the feasibility of Executive Stock Option got started to be suspected by people. Having seen the successive abandon announcement for Executive Stock Option from Microsoft and Citi, people questioned it extremely.The ESO was not introduced to China until 1990s. In the next decade, The ESO system in China listed companies was greatly improved by a series of reforms, and the number of companies implementing ESO system was raised rapidly.In this thesis, by researching the questions of ESO and Earnings Management and by deeply analyzing the effects of ESO on company performance, some recommendations are given to improve the negative impact of ESO. The highlight of this thesis is the further analysis of the reasons that ESO results in Earnings Management and corresponding proposals. Firstly review the relevant literature to summary of the theories. Secondly, analyze and comment the situation of domestic listed companies implementing ESO based on reality. Thirdly, get the conclusion that ESO can enable companies to improve performance. Up to the end of 2009 data of 35 listed companies are selected as samples to demonstrate the effects of ESO on the Earning Management for domestic listed companies. It also shows the existence of an action of Earnings Management motivated by a desire of high returns for managers in the listed companies implementing ESO, and its level has a positive correlation with the level of ESO.Based on the above study, this thesis states the reason that ESO results in Earning Management and make recommendations to improve ESO system for domestic listed companies.