The Case Study Of Company Kunbaida’s Equity Rights Incentive

Begin in2006, the CSRC, the SASAC and the Ministry of Finance and other agencies introduced a series of documents for Chinese listed companies to provide the institutional basis of equity incentive. With large-scale implementation of equity incentive,the relationship between equity rights incentive with the listed company earnings management has become an important issue that the academia concern about. People creat equity rights incentive in order to improve the corporate governance structure, reduce agency costs, incentive management to create value for shareholders better. But in practice, the management of some listed companies so sa to achieve incentive conditions, conduct various forms of earnings management, even demage the interests of the shareholders seriously.The paper studied the relationship between equity rights incentive and earnings management by the case of Company KBD, a company mainly controlled by one shareholder. First, the author restated the theory of earnings management and equity rights incentive by literature rewiew, then depicted the case of the KBD company,(mainly contained the company’s operating circumstances, the the equity incentive plan, the content of earnings management activities. The analysis of the company’s focus on the complex real estate projects, capital operation which manage earnings, and demage to shareholders by earnings management. Then the paper pointed out the drawback of the equity right incentive plan, including necessity of incentives plan, plan’s unlocked condition setting, the choice of motivational tool, capital costs and risks. The author believed that the company flawed governance structure, asymmetric information is the cauese of aggressive equity incentive program and earnings management. Finally, the relationship of equity rights incentives and earnings management in KBD case is discussed.The author considered that the two things in KBD case are no direct causal relationship and both the result of poor corporate governance structure.This article ultimately concluded:equity rights incentive is a double edged sword, can generate positive incentives, may also become a tool of earnings management or benefits delivered; a good equity incentive plan needs the corporate governance structure to provide support; the stock’s price of company having a certain validity is a necessary condition for successful implementation of equity incentive; listed companies’earnings management form is not limited to twisting financial information, but also to distorting normal business activities and the complex capital opertion; problemed earnings management and equity incentive program do not necessarily have a direct causal relationship, may both the result of poor corporate governance structure.Finally, the author concluded a series recommendations:increaseing supervision of government departments; improving the level of information disclosure of listed companies; enhanced third-party evaluation mechanisms; optimizating the corporate governance structure, achieving the diversification of shareholders; optimizing the equity incentive plan design.