Study On The Correlation Between Management Equity Incentive And Firm’ Growth

Established since October2009, Growth Enterprises Market (GEM) has developedinto a board with355listed companies, among which84companies had adopted equity incentive plans. Originated from Pfizer, equity incentives have been widely used across the world. However, no consensus has been achieved in both theoretical study or in practice. This paper makes an empirical study on the influences of equity incentives from GEM listed companies on their business growth, exploring the effects of such incentives so as to provide references for government to perfect relative laws and institutions, and for companies to come up with more efficient incentives.This paper begins with the literature review of domestic and foreign studies on firms’growth and correlation between that growth and equity incentives, this paper presents main research methods and achievements. This part is followed by a brief review of the equity incentive methods:stock option, restricted stock, phantom stock, and so on. By giving detailed introduction of incentive methods, incentive percentage, and industrial distribution, this paper analyzes the current status of equity incentives in GEM companies.Through the introduction of relevant theoretical theories-the principal-agent theory, the human capital theory, the technological theory and the firm growth theory, this paper tries to find the connection between companies’growth and their equity incentives. And based on that, this paper proposes its research hypothesis.Listed companies on GEM board usually root in high-tech fields. For them, company growth doesn’t only mean increase of profit can scale, but also the improvement of innovation capacity. To better measure listed companies’growth, this paper adopts16indicators from6aspects including profitability, operation, innovation, sustainability, and so on. Each company will get a growth score through principal components analysis. This paper uses56listed companies on GEM board as sample, all of which have announced equity incentive plans in2012and have enough data (excluding the companies that later cancelled those plans.) In empirical study, based on considerations of influential factors for company growth like scale, asset-liability ratio, industry variety and other influential factors, this paper chooses contrast samples for independent samples T-test, which as a result proves that companies don’t choose equity incentives based on their growth condition. This is followed by a regression analysis with senior management average shareholding ratio and management shareholding ratio as its independent variables. The regression analysis is to find the relation between the two independent variables and dependent variable-companies’growth score. The outcome shows that there is positive correlation between GEM listed companies’equity incentives and their growth condition.The regression analysis finds that both senior management average shareholding ratio and management shareholding ratio have positive influence on GEM listed companies’growth condition. This paper holds a personal view that such a result might come as influenced by the following factors:GEM has a very short history, whose application of equity incentives is immature; the equity incentives ratio remains low; the incentive method is not diversified; a slowing down Chinese economy and a resulting turbulent stock market. When more data becomes available, another study is recommended with improved methodology.On the other hand, this paper generates suggestions to government that a better legal environment is needed for better implementation of equity incentives. Listed companies are advised to draw distinctive incentive plans based on companies’unique feature, and use objective evaluation system to better encourage managers’ performance.