Executive Equity Incentives And Accounting Fraud

Equity incentive is a "two-edged sword", it can decrease the cost of agent and get active effects of long-term incentive in suitable condition, otherwise, it brings with some new moral hazard and produces corrupt practice such as information manipulation, fabricating profits and false statements. In our country, many companies begin to implement equity incentive plan and it has become the consensus and policy orientation that using equity incentive to inspirit top managers in recent years. With the related measures gradually forming, equity incentive has been received more and more focused. So it is necessary to recognize the effects of equity incentive objectively through systematic study of the influence of the implementation of equity incentive on accounting frauds in the time when the equity incentive plan will be implemented in a large scale. It is very significant whether to the smooth implementation of executive equity incentive or to the prevention and management of accounting fraud.This paper comprehensively uses normative and empirical method for the analysis.Firstly, reviews and evaluates the related theory about executive equity incentive and accounting fraud using normative research method.Analyzes synthetically the research achievements at home and abroad and deduces from the executives equity incentive angle that Chinese listed company management have the motivation to make accounting fraud for the purpose of improving their remuneration.Secondly, examines the association between executive equity incentives and accounting fraud in Chinese listed firms by logistic regression, using a sample of 77 firms accused of accounting fraud by the China Securities Regulatory Commission (CSRC) during the period 2005-2009 and 77 matched firms (matching on industry, year and firm size) not accused of accounting fraud.The empirical results show that it is positively associated between executive equity incentives and accounting fraud in Chinese listed companies but not significantly; the number of board meetings is positively associated with accounting frauds significantly; Asset-liability ratio has a significant positive correlation with accounting fraud. Predictably, Chinese listed company equity incentives prompted the company operators to make accounting fraud by means of false report for their income maximization. Equity incentives play a role in producing negative effect as it has active effects in improving companies'performance, but due to the strength of Chinese equity incentives is small, the negative effect of accounting fraud inspired by equity incentives is not quite apparent. Hence, it is necessary to grasp the optimal equity incentives strength as possible to avoid its negative effects when the listed companies implement equity incentive plan.