Case Study On Equity Incentive Of Gree Electric Appliances

With the implementation of the joint-stock reform, the modern enterprise system has been built up in China gradually. More and more companies are using equity incentive as the new mode of distribution. Compared with the United States, China’s equity incentive has a later start. The equity incentive emerged in the United States in the last eighties, which is three decades earlier than that in China. Equity incentive can effectively solve the issue of entrusted agency which is caused by the separation of management and ownership in the modern enterprise system.In2005, the China Securities Regulatory Commission gave publicity to "Administrative Measures (Trial) to Equity Incentive of Listed Company", which announced a prelude to the implementation of equity incentive of listed companies in China. Totally a number of261listed companies announced pre-arranged planning of equity incentive between2006and2011, and a statistical analysis showed an overall upward trend on the number of companies announcing equity incentive plans. However, among the large number of companies who announced pre-arranged planning, only60listed companies fulfilled equity incentive. Gree Electric Appliances, as the leading enterprises in the household appliances industry, is among the minorities who fulfilled the equity incentive. Case studies on its equity incentive can provide valuable practical experience for listed companies, especially listed companies of the household appliance industry.In this paper, through a summary of the equity incentive theory and the literature review,the author introduced the theoretical development of the equity incentive as well as the empirical research on equity incentive and the market reaction at home and abroad first. After that, the author analyzed the macroenvironment of equity incentive in China and did a descriptive statistical analysis on implementation of equity incentive from2006to2011. On this basis, the author analyzed the equity incentive plan of Gree Electric Appliances. Event study was firstly adopted here to analyze the market reaction on the release of Gree’s equity incentive pre-arranged planning and the implementation of equity incentive. Two conclusions are draw from above analysis. The first is that Gree’s equity incentive plan is designed to be simple and probably be the self-motivation of the management. The second is that Gree’s cumulative excessive return was significantly positive and showing a positive market reaction at the declaration of the equity incentive pre-arranged planning and equity incentive plan of2005. However, when declaring equity incentive plan in2006and2007, Gree’s cumulative excessive return was negative, thus a negative market reaction was reflected. The negative reaction was influenced by the stock market downturn in2007and the financial crisis in2008. On the whole, under normal circumstances, the equity incentive may bring positive market reaction in the short term.