The Study On Legal Regulation Of Stock Option Incentive

Stock option incentive is a kind of long-term incentive mechanism which a company accords a certain amount of shares to its directors, senior executives, key technical professionals and other staff. From the 1950 s, America and many European countries, by means of stock option incentive, has reduced agency cost between management layer and shareholders, raised work efficiency of management layer and strengthened the competitiveness of the company. However, stock option incentive mechanism is a double-edged sword. If there are not perfect enough laws and regulations to govern stock option incentive mechanism, such mechanism cannot ease the problem of principal-agent, on the contrary, it will become the tool of earnings management by management layer, thus aggravating the problem of principal-agent.Stock option incentive mechanism was implemented lately in Chinese companies, but it has developed rapidly. Due to imperfect legal regulation and unsound laws and regulations of stock option incentive, earnings managements is always incurred.The current study on legal regulation of stock option incentive in Chinese jurisprudential circle is mainly focused on the mechanism and positive effects of stockoption incentive and relatively lacks the research on negative effects of stock option incentive. This dissertation, taking earnings management as start point, studies the negative effects of stock option incentive, which will be helpful to further understand and complete the legal regulation of stock option incentive and will provide reference for evading negative effects during the implementation of stock option incentive.The Introduction of this dissertation concludes current research results on the relationship between stock option incentive and earnings management in the form of literature review. It is widely believed that stock option incentive will induce earnings management by management layer. Through the cases analysis of Wanke, Bright Dairy, Suzhou Golden Mantis, etc., the introduction analyses the means of earnings management in the background of stock option incentive of listed company. In addition, this part summarizes current condition of study on the legal regulation of stock option incentive in Chinese jurisprudential circle.Chapter One of this dissertation introduces the appearance of Chinese stock option incentive mechanism and its early application in Chinese enterprises. This part also analyses the practice condition and characteristics of Chinese A-share listed company and raises the problem of earnings management and its damages in the background of stock option incentive of listed company.By means of legal economics, Chapter Two analyses the reasons of earnings management in the background of stock option incentive in four viewpoint of theory,practice conditions of stock option incentive, legal nature of stock option incentive and current regulations of stock option incentive. First, in the theoretical perspective of stock option incentive and through principal-agent theory, this part analyses that,lacking of constraints, stock option incentive will urge managers to pursue profits for themselves by virtue of earnings management. Secondly, in the perspective of practice conditions of stock option incentive and in four aspects of effectiveness of capital market, corporate governance structure, corporate performance evaluation system and market environment, this part demonstrates the influence on earnings management by practice conditions of stock option incentive. Thirdly, in the perspective of legalnature of stock option incentive, this part analyses different legal natures of stock options in different stages and different motives of managers’ earnings management in such different natures. Last but not least, in the perspective of current regulations of stock option incentive, this part presents current laws and regulations of stock option incentive and analyses the problems existing in such laws and regulations, which include the following ones:(1) low level of current laws and regulations of stock option incentive;(2) lacking of independence of listed company compensation committee, thus causing probability of earnings management and financial fraud by management layer;(3) the time of waiting period and validity stipulated in current laws and regulations are both too short, therefore, the management layer doesn’t have enough time to satisfy performance indexes and has to achieve the performance purposes through earnings management;(4) although there is some relatively perfect information disclosure rules of stock option incentive mechanism in China, the problems of completeness, authenticity and hysteresis of such rules still exist in practice.Chapter Three briefly retrospects the stages in germination, in growth, in maturity and in cooling and analyses the characteristics of American stock option incentive in such stages and countermeasures that America deals with the problems of financial fraud and earnings management incurred by stock option incentive. This part concludes the types, managerial authority, vesting conditions, vesting time, vesting price, taxation system and main content of information disclosure rules of American stock option incentive and finds out the experiences that China can learn from.Chapter Four proposes some suggestions to legal regulation of Chinese stock option incentive, combining with American experiences and lessons during the development of stock option incentive and actual situation in China. These suggestions include complete compensation committee system, information disclosure system and design of waiting period and validity.The Conclusion of this dissertation concludes overall conditions of stock option incentive in Chinese corporations, the problem of earnings management in thebackground of stock option incentive and urgency of completion of stock option incentive system. In addition, this part also concludes the experiences and lessons of stock option incentive in America and proposes some advices correspondingly in accordance with Chinese situation.