Equity Incentives And Earnings Management

Ever since January2006, some governmental organizations, such as the Ministry of Finance, National Resources Commission and China Securities Regulatory Commission, have issued a series of legal regulations which are related to stock option incentive system of listed companies. These regulations together have established a comprehensive system to supervise and guide the implementation of the stock option incentive system. Thus, the enthusiastic of the listed companies in China has been aroused. It has been proved by the modern enterprise theory and foreign practice that the stock option incentive system has great positive influence on the development of company through improving the management structure, reducing the agent cost, increasing the management efficiency and strengthening the cohesion and competitive ability of the company. However, we should still be aware that there also come several conflicts and problems with the implementing of the stock option incentive system, in which the earning management problem is a typical example.This is just a positive study about the earnings management problem coming with the implementation of the stock option incentive system. We firstly reviewed some related study, both domestic and foreign ones, and then we briefly analyzed the situation of the stock option incentive system in the SME board listed companies of China.Sums up the theoretical foundation of equity incentives and earnings management, describes the motives and methods of earnings management, we find that the managers of SME board listed companies in the implementation of equity incentives system have the motives of earnings management. Based on these studies, We took the SME board listed companies who had issues the announcement about the stock option incentive system plans from2007to2010as our study sample and took their annual report and related announcements as the information resources. After careful selection, we finally got sixty-three effective sample companies. We made use of the SPSS16.0statistic software to analyze the model that we constructed with several variables such as the incentive degree, manners and earnings management degree, by the way of multiple-key linear regression.The conclusion we eventually got is:In China, the stock option incentive system has some stimulant effect on the earning management behavior of the listed companies. The higher the incentive degree, the larger obvious the earnings management tendency is. Besides, some key factors in the stock option incentive plans, such as the validity period of the incentive objects can also affect the earnings management behavior of the SME board listed companies. At the same time, we also get the following conclusions The scale and surplus management of the implementation of equity incentive of the SME board listed company does not exist a significant positive correlation; The asset-liability ratio and operating activities cash net flow exist with significantly negative relationship related to the surplus management; The rate of net assets return and earnings management exists a significant positive correlation; significant positive correlation exists between the largest shareholder stake and management compensation and earnings management.For the above analysis and combined with China’s actual situation, policy recommendations is put forward to improve the behavior of earnings management of listed companies in the implementation of equity incentive, such as improving the management incentive system, to strengthen the securities market operation and regulation, improve the corporate governance structure to promote the Accounting Standards reform, the establishment of norms of professional managers market. This conclusion is of great help in revealing the earning management behavior of the SME board listed companies and of great value in improving the stock option incentive system and strengthening the regulation of the SME board listed companies, so as to protect the interests of the common investors.