Empirical Research On Earnings Management On The Management Equity Incentive

The main feature of the modern company is the separation of its ownership and its right of control. Therefore, the company’s managers often are no longer the owners of the company. They form a kind of principal-agent relation. According to the Hypothesis of Economic Man, managers as the agent of the company are certain to maximize self-interests. Such could damage the interests of the principal. To avoid this, the principal will usually supervise the agent. However, this increases the agency cost, causing agency problem. Equity incentive plan can reduce agency cost and solve this kind of agency problem. It is a long-term incentive mechanism by offering its directors, senior management personnel and technical professional awards of company stock. Its principle is to have the company managers also enjoy the company shares. Thereby in the process of maximizing self-interests the managers are willing to promote the interests of the owners. That is to say, when the managers also own the company shares as the owners, they will work harder to improve the company value and raise the share price to increase their own profits. This process conforms to the maximization of shareholders’profits.But the key of the equity incentive lies in whether the managers will raise the company’s stock price through the way of improving the company value by working hard. Because of information asymmetry, the external investors can not get to know the real value of the company. They can only estimate its value through all kinds of financial statements released by the company. Such will induce the managers to raise the company stock price through earnings management by increasing the surplus. And then, they will realize their own interests by cashing their stocks. That is to say, equity incentive might induce managers to raise its share price through the earning management and consequently do damage to the interests of owners. To this end, this paper constructs a model using the principal-agent theory, derives the agent effect function formula, and then analyzes how different forms of equity incentive plans will affect the choice of the agent, aiming to provide references for listed companies to launch effective equity incentive plans.In this paper, at first the equity incentive and earning management are reviewed, and then the equity incentive and the internal mechanism of the earning management are analyzed using the mathematical model constructed. The conclusions are that different incentive mode, quantity, time limit, conditions have different influences on the earnings management. In this paper, the author selects44listed companies as samples which have carried on equity incentive plan from2006to2011, and then chooses panel data to estimate their level of earnings management using modified JONES model, and then analyzes whether the implementation of equity incentive plan will cause the managers earnings management behavior using multiple regression model. The author then divides different incentive elements into different groups; using T-test to examine whether different incentive plans are to cause different earning management levels. The results show that the implementation of equity incentive plan indeed can cause earning management. Meanwhile the incentive quantity is positively related to earning management, and strict regulation constraints can exercise its restraints on earnings management behavior.