Research On The Market Efficiency Of The Accounting Treatment Of Stock Ownership Incentive

With the promulgation of "Management Regulation on Stock Ownership Incentive in the Listed Companies", the use of stock ownership incentive becomes more and more popular. The newly promulgated "Accounting Standards for Business Enterprises No.11-Share-based Payments" in 2007 specifies how to treat share-based payments such as stock option. According to the "Accounting Standards For Business Enterprises No.11-Share-based Payments", companies should confirm expenses caused by share-based payments granting to managers on the basis of the fair value in different periods, thus diluting EPS and influencing on the investment decisions made by investors. It is clear that the implementing effect of "Accounting Standards For Business Enterprises No.11" is directly connected with the function of the executive stock ownership incentive system. This paper analyses the market efficiency of the accounting treatment on stock ownership incentive basing on the theory of accounting economic consequence and efficient market hypothesis (EMH).The practical effects show that the reported earnings is reduced by the expensing treatment on stock ownership incentive, then how investors react to such an incentive system which aims at solving the principal-agency problem. Whether investors are influenced by the reported earnings? According to the EMH, in the week form efficient market, investors can identify whether the change of financial performance is caused by accounting treatment or condition of business. Then is there any ARs and CARs when companies announce the influence on financial performance caused by the incentive expense? This paper is just aimed at solving these problems.This paper uses the event study method to analyze the market reactions to the accounting treatment on stock ownership incentive so that supply evidence to judge the efficiency of capital market. Choosing the 15 listed companies that expense stock ownership incentive in annual reports in the year of 2007 and 2008, besides those 15 sample companies disclose the influence on the financial performance by stock ownership incentive expense. Further more, this paper chooses three companies which announce the influence on the financial performance by stock ownership incentive expense without other news. This paper gets the following results by studying AR and CAR in 5-day and 10-day windows:1. The six companies which cause negative market reaction have significant negative ARs and CARs, while the positive react is significant for the other nine companies. By comparing the CARs before and after the announcement of those six companies which cause negative market reaction and the other nine companies, as well as the three companies which announce the influence on the financial performance by stock ownership incentive expense without other news, it can be conclude that the capital market is lack of efficiency.2. The CARs of Inner Mongolia YiLi Industrial Group Co., Ltd, Hainan Hai Yao Industry Holdings Co., Ltd. and China Vanke Co., Ltd are all significantly different from 0 in window period. There is no positive CARs for Inner Mongolia YiLi Industrial Group Co., Ltd when the window period is 21 days long, and the CARs keep decreasing in the 11days window. This phenomenon also happens for China Vanke Co., Ltd. It can be concluded that the market react slowly to the announcement disclosed by these two companies, which means delayed reaction. The significant abnormal reactions of the three sample companies provide realistic evidence that the capital market have not achieved to semi-strong form market.