Equity Incentive Market Reaction Research Based On Event Study Method

With the separation of ownership and management in the modern enterprise, equity incentives developed as tool for solving the problem of agency problem. From the1950s, The United States began to use stock ownership incentive, and the stock ownership incentive is now accepted by most of the companies in the U.S after more than half a century’s development. The European countries began to develop equity incentive system from the1980s. From the practice experience and academic research in the western country, it seems that for either to solve the entrusted agency issues, or promote the growth of enterprise performance, the stock ownership incentive have made positive effect. The history of incentive system in China can be traced to the end of the Qing dynasty through Shanxi ticket lines, but for historical reasons, it has officially get promoted until in recent years. After the Equity division reform, the government put out a series of laws and regulations, and the implementation of equity incentive conditions become mature. The incentive system began to develop. From the result of empirical studies, the implementation of equity incentive can play a certain effect for both enterprise financial performance and market reaction.To investigate the market response of stock ownership incentive in the A share market in China, this paper using Fama-French three factor models through the event study. The sample includes the companies which made a public announcement during2005and2011in China. It also further discussed the difference between different countries and different way of incentives.Through an empirical study, this paper found that the proposed five hypotheses have been a certain extent of validation:(1) the announcement of incentive can cause excess profit in the market.(2) The reaction of high-tech Company is more than the un-high-tech companies. For both total return and average return, high-tech Company has better reaction than the market reaction for un-high-tech industries.(3) The return of stock which use option as tools for the stock ownership incentive should be less than companies using stocks as tools in30days prior to the announcement.(4) Different ways to the stock ownership incentive company market response will have different market reaction.(5) The market has a significant excess return before the publish of announcement.Based on the empirical study, the paper also gives some policy suggestions for the development of equity incentives.