The Empirical Study Of The Performance Of Equity Incenitve In Chinese Listed Companies

Equity incentive system is an effective solution to the modern enterprise principal-agent relation; ithelps to solve the agency problem between shareholders and managers, in order to promote the company’smanagement to avoid short-term behavior, thus prompting more attention to the company’s long-termsustainable development. According to the modern motivation theory, the equity incentive is an effectivelong-term method. It can make the interests of shareholders and managers as consistent as possible. Onmature markets abroad, equity incentive is usually used, by listed companies to promote long-termdevelopment of the companies. However, due to the different stage of the market economy in China, ourequity incentive environment and conditions are different. In theory, advanced and effective incentivemechanism may not produce the same effect in our country. This thesis conducts the empirical researcheson the performance of equity incentive of the listed companies in China.This thesis regards the listed companies implemented the equity incentive system in China between2006-2010, as the research object to equity incentive according to marketing effects and performanceeffects. First of all, the author uses the events study methodology to examine the marketing effect of equityincentives in the listed companies in China. Secondly, by the method of factor analysis, the author getscomprehensive achievement quota, reflecting the company’s profitability, solvency, growth ability and theability of capital operation. This quota is taken as the dependent variable to represent the performance ofenterprises, and the ratio of the stocks used for incentive to the total capital stocks as independent variables.The author carries out the linear regression to examine the performance effects.The results of this study show that: the equity incentive of listed companies in China can not have apositive market effect and substantial improvement in the company’s operating results. On the equityincentive event day, the company has a short-term abnormal return ratio, but in the most of the event studywindow, there is no significant abnormal return ratio which suggests that the equity incentive does nothave a positive market effect; by the factor analysis method, there is no significant change in operatingresults, either, which means equity incentive fails to promote the operating results. These two methods bothreflect that the equity incentive has no obvious positive effect. Based on the empirical results, there existsome problems in the process of working out the equity incentive plan. The paper concludes withsuggestions to improve the internal and external environment of the listed companies in China on thesequestions.There are eight chapters, each chapter as follows:The introduction covers the background for this research, the significance of the paper and a briefreview of foreign and domestic literature, as well as a brief description of the research methods, technicalroute and the innovation.To pave the way for further analysis, chapter2first reviews equity incentive theory, including theprincipal-agency theory and the behavioral motivation theory.and then explores the relevant concepts andthe mode of the equity incentive.The third chapter analyses the institutional background and current situation in which the listed companies implement the equity incentive in China. First it introduces the institutional background ofChina’s listed companies implementing the equity incentive. Secondly, it examines the overall situations ofthe listed companies which have launched the equity incentive program, including yearly statistics,industry distribution, company type, the choice of equity incentive model, sources of equity incentive stockand the implementation efforts.The fourth chapter presents the equity incentive effectiveness measurement and evaluation methods.First it introduces the equity incentive effectiveness module, including the abstract, unquantifiable standardand actual, quantifiable standard. Then it presents the choice of equity incentive performance module andcommonly used methods of performance evaluation, includes financial index method, the balancedscorecard method, economic value added method and Tobin’s Q value method. The author just choosesfinancial index method as the performance evaluation method in this paper.The fifth chapter recounts the equity incentive market effect in China’s listed companies. First itdescribes the event study method, followed by the specific steps: Firstly, defining the event and timewindow. Secondly, constructing a sample. Thirdly, introducing the normal revenue model. Fourthly,calculating the abnormal return ratio and the cumulative return ratio. Ultimately coming to the empiricalresults that the equity incentive plan has no positive marker effect and the company’s stock price does notshow a stronger result than market expectations, and investing in such companies are not able to get acertain amount of excess income. The results also shows that the response of the market to the incentivestock options is not obvious, or that the company’s qualifications and the investment potential will not havesubstantial changes even with equity incentive.Chapter VI presents the listed company’s equity incentive performance effect. By factor analysismethod, the author turns the eights financial quotas which represent the company’s profitability, solvency,growth ability and capital operating ability into the companies’ comprehensive performance evaluationquota, as the dependent variable to show the companies’ operating performance. Using the proportion ofshares for equity incentive as independent variables, the author carries out the linear regression to study theequity incentive. There is no obvious positive effect on the consolidated results.Chapter VII provides some suggestions to improve the equity incentive effect. This chapter introducesthe recommendations to improve the internal and external environment in China’s listed companies.andconcludes the results that the equity incentive of listed companies in China can not have a positive marketeffect and substantial improvement in the company’s operating results of this research and makes someprospects for development.