Practice Diffusion And Variation

As an important mechanism of corporate governance, equity incentive can alleviate the problem of principal-agent between shareholders and the management effectively via profit sharing and risk sharing. Since the SFC implemented "Equity Incentive Management Approach for Listed Company", there are more than two hundred companies granted equity incentive programs, the number of it spiraled upward every year. Many companies of them have the relationship of interlocking directorates, also some companies belonging to the same controller. Besides, there are also significant differences in industries and geographical distribution of them. In view of this phenomenon, the article based on Practice Diffusion Theory, highlighting the social embedding characteristics of a listed company, using the sample of Shanghai and Shenzhen listed companies who reported equity incentive plan from July 1st.2005 to December 31st,2010, to examine the spreading and variation of equity incentive practices in China's capital market.To begin with, the article reviewed domestic and foreign research on motivation of enterprises in implementing practice and the mechanism of practice diffusion. And found that decision-making is not entirely rational, non-institutional factors will also affect activities of the organization effectively. Owing to the embeddedness features of social organizations, the social relationships will affect their decision-making. The social relationships that linking listed companies who implement equity incentive including the direct links of interlocking directors and the same controller, the symbolic links of the same region and the same industry. These social relationships will affect the spreading of equity incentive. Based on the above founds, the author begins the study of equity incentive diffusion and variation.Secondly, the author has examined the mechanism of the diffusion. The direct links of interlocking directors and the same controller is important formal or informal communication channel between the companies. Via this channel, companies can get the up-to-date business information and the best overview of business environment. It can also provide practical knowledge and experience for enterprises. Besides, due to the legitimacy pressure, companies with symbolic links of the same region and the same industry will mimic the behavior of others to make their behavior "reasonable", so practice will also spread through industry and region.Thirdly, the author has described variation phenomenon in the diffusion of equity incentive based on inter-organization perspective; and using knowledge transfer theory, the mechanism of variation has been studied. We recommend that the process of practice diffusion is often accompanied with transfer of practical knowledge between enterprises through specific channels. The knowledge includes tacit knowledge and explicit knowledge. The kind of knowledge that a company acquired is an important factor affects variation. Our article recommend that interlocking directors and controllers can transfer tacit knowledge, and industries and regions only transfer explicit knowledge:when equity incentive practice diffuse through interlocking directors and controllers, it doesn't prone to vary, when it diffuse through the industry and region, it prone to vary.Finally, the author has described how equity incentive varies based on legitimacy pressure of implementing an equity incentive practice with higher incentive and constraint characteristics that early adopters and later adopters confront. Owning to later adopters confronting more legitimacy pressure than early adopters, later adopters prone to implement an equity incentive practice that with higher incentive and constraint characteristics.The contribution of this study is that it has explained how social embeddedness affect companies'behavior in a inter-organization perspective, described how practice vary as they diffuse and analyzed internal mechanism of variation based on knowledge transfer theory.In the end of the article, the author has came up with a framework to integrate the research findings, and pointed out the limitations and future research directions.