Equity Incentive Effect?

A very important issue in corporate governance is the agency problem between management and shareholders, which is generated from the separation of corporate control and ownership, thus equity incentive is applied to solve the agency problem. It’s not until2005when the Company Law was revised, in particularly the introduction of "Listed company equity incentive measures", did the external environment for equity incentive improved a lot.By reviewing of literature, the author divided equity incentive plans into4categories, using horizontal comparison method, vertical comparison method and scoring method. This paper first examines the market reaction for announcement of equity incentive plan, found that abnormal returns are significantly positive in [-2,+1] window period around the event date, thus proved the market believes equity incentive plan can enhance the value of the company, the announcement of the equity incentive plan brings positive wealth effect to shareholders. The market reaction is different regarding to different classification methods. By regression, only the vertical comparison group proved incentive ones’market reaction is stronger than the welfare group. Finally, the matching method for testing whether implementation or not can improve the company’s performance shows that before the implementation, there were no significant difference between ROA and ROE of the sample and matching firms, but after implementation, ROA and ROE show significant differences in the implementation year and two years after, regression results also show that the implementation of equity incentive has a positive impact to the performance of the company, thus the overall equity incentive is effective. The four classification methods show no significant differences in the improvement of company performance, the paper concludes that investors can tell the incentive plan is strict or not by judging the exercise performance conditions, but the classification has no affect in differentiating enhancement of company performance.