Equity Incentive, Vesting Conditions And Earnings Management

Equity incentive as an advanced way of incentives can effectively improve the efficiencyof management and reduce agency costs. The publishment of shares of listed companies’incentive management approach and the preliminary completion of reform of non-tradableshares supply institutional environment, reference and guidance for the implementation ofequity incentive, and then many listed companies have proposed equity incentive plan. Butequity incentive is a double-edged sword, and equity incentive induces earnings managementbehavior more serious than previously. This paper dose an empirical research on therelationship between equity incentive and earnings management.This paper does a systematic summaries and combing on theories of earnings managementand equity incentive first, and then analyzes the present situation of equity incentive. Based onthese studies, this paper will do serious empirical analysis about the relationship between equityincentive and earnings management. This paper collects the data of120listed companies,which have published equity incentive plan between January1st,2006and December31st,2008,and then selects111valid samples. This paper divides sample companies into incentivecompanies and welfare companies according to vesting conditions whether they exceed theaverage level of past three years before the implementation of equity incentive. And based onthe grouping, this paper starts the study of relationship between equity incentive and earningsmanagement. This paper selects company size, capital structure, ROE, ownership concentrationand the total remuneration of the three highest-paid executives as control variables to establishthe regression model between equity incentive and the degree of earnings management. Thispaper uses SPSS.19to do multiple regression analysis.After empirical analysis, this paper draws conclusions as below. First, the managementlayer proceeds positive earnings management after the implementation of equity incentive.Second, the higher equity incentive’s proportion is, the deeper earnings management’s degreewill be. Third, there is no significant negative correlation between incentives validity andearnings management degree. Fourth, the degree of earnings management of incentivecompanies is higher than welfare companies’. This paper helps to reveal the earningsmanagement behavior of listed companies which have implemented equity incentive, and itprovides regulatory direction for supervision department and guidance for companies whichwill implement equity incentive in the future.