On The Relation Between Equity Incentives And Earnings Management Of Listed Companies

As a new incentives measure, equity incentives aligns the interest of the businessmanagement with the long-term interest of the company and decreases the cost of agenteffectively. Along with the implement of the Measures for Administration of EquityIncentives Plans of Listed Companies (For Trial Implementation), the listed companies inour country begin the establishment of the standard eqtuiy incentives system in 2006.Many of our listed companies put forward its equity incentives plan. However, the equityincentives has two sides'effects: it gets positive effects of long-term incentives insuitable condition; otherwise, it brings with some negative effects, such as moral hazardand earnings management.The article uses the principal-agent theory, enterprise contract theory and economicstheory, combination of qualitative and quantitative analysis to study the relation betweenequity incentives and earnings management of listed companies. The goal is to deepenthe understanding of relation between them, to provide some useful suggestions forimproving the design of equity incentives mechanism and strengthening investorprotection.This paper systematically summaries the theories and literatures of the equityincentives and the earnings management, and then build a principal-agent model toresearch the intrinsic mechanism of equity incentives and earnings management. Weshow that an increase in equity incentives does increases earnings management, anddirectors adjust their oversight effort in response to a change in equity incentives. Basedon this study, this paper selects forty-six among forty-nine listed companies which haveimplemented equity incentives before December 31th, 2006 as a sample. It also estimatesthe level of earnings management by adding stock and cost to modify Jones model, usessimple T-tests testing the listed companies'earnings management prior to theannouncement of equity incentives plans. Based on the multiple linear regression model,this paper does an empirical research on the relationship of equity incentives andearnings management in the equity incentives process of listed company by using paneldata. The result shows that the listed companies have downward earnings managementby lowering discretionary accruals during one year prior to the announcement of equityincentives plans. In the implementation of equity incentives of listed companies, there issignificantly positive correlation between the degree of earnings management and thedegree of equity incentives.