An Empirical Analysis On The Effectiveness Of Equity Incentive In Private Listed Companies Based On EVA

The equity incentive is an incentive mechanism that endows managers with some stock options so that they can undertake the operational risk when they enjoy its benefits. This system will help them to balance the interest of the owner, to avoid the risk of moral hazard and adverse selection, which greatly reduces the agency cost. It is like the"golden handcuffs:which closely link the interest of managers and owners so that they can share the benefits and risk altogether. When the managers hold the stock option of the company in a certain period of time, they will strive to improve the value of the company during the process of management, which in turn increase the wealth of stockholders. Equity incentive began as early as in the west while China gradually adopts equity incentive system until1990s. From March to September in2008, China securities regulatory commission issued a memorandum concerning "the equity incentive1,2,3". In October the same year, the state-owned assets supervision, the administration commission and the ministry of finance issued about specification state holding listed company on the implementation of equity incentive which help the equity incentive system become mature. So far, most of domestic literatures of equity incentive mainly focus on the listed company or the state-owned listed companies in our country and only a few of the literature research care private listed companies. As an essential part of capital market, private listed companies are absolutely indispensable. Most of them devote in technology-intensive or knowledge-intensive industries, which pushes the human capital to a critical role in the development of company. Since the private listed companies are different from the corporate governance structure of state-owned enterprises, they have inner motivation to implement equity incentive system. Based on the background, this article attempts to study the effectiveness of private listed company equity incentive through the EVA performance evaluation system in order to provide Chinese private listed companies with references for design and implementation of equity incentive management. In this paper, the innovative EVA performance evaluation method is introduced to measure the performance of private listed companies. By using the combination of theory and empirical method and comparative analysis, an empirical research is done on the effectiveness of equity incentive about Chinese private listed companies. Besides, some suggestions are put forward to improving the equity incentive mechanism according to the research.This article is organized in the following five parts:The first part is the introduction that mainly introduces the background, theoretical and practical significance. The related literature at home and abroad are reviewed and analyzed in class. Besides, the method used in this research, the content and frame of this article can also be found in this part.The second part illustrates the theoretical basis and current situation of equity incentive in private listed companies. This section firstly redefines the meaning of two key phrases in this paper which are the "private listed companies" and "managers". This article defines the private listed companies as the actual control of man-made non-state enterprises listed companies. Then the basic theory of equity incentive is interpreted. Academically, there are different points about the theoretical basis of equity incentive. However, it can be summarized as principal-agent theory, human capital theory and two-factor theory. What follows is the explanations of two hypothesizes about equity incentive, which are "convergence of interest hypothesis" and "managers’defense hypothesis". The last part of this section describes the current situation of equity incentive in Chinese’s private listed companies, which can give guidance to the empirical analysis in the following.The third part introduces the evaluation index of effectiveness of equity incentive in private listed company-EVA performance evaluation theory.This section is the highlight of this paper, which fully illustrates the connotation of EVA, functions of EVA, computing method of EVA and advantages as well as the limitation of EVA. On top of that, this part answers why EVA is used as the performance evaluation index, which lays the foundation of subsequent research.The fourth part demonstrates the empirical research for the effect of equity incentive in private listed companies. For the introduction of a series of laws and regulations about equity incentive from2008, the regulations of equity incentive are different from before. Besides, Chinese macroeconomic was affected by the global financial crisis in2008. In order to guarantee the reliability and consistency of data, this paper selects samples from those private listed companies, which are either carrying out the equity incentive system or done with the system. The EVA performance index is used to evaluate the effect of equity incentive after considering the hysteretic quality of equity incentive and its interval effect. The descriptive analysis and regression analysis are imposed on testing whether the level of equity incentive has impact on corporate performance.The final part is the conclusion and prospect. In this section, a summary is made according to the results of previous regression analysis and some corresponding suggestions are put forward based on the summary.Meanwhile, this part points out some deficiencies of this paper and some problems that may come across in the subsequent research.By using the EVA performance evaluation method to test the effect of equity incentive in private listed companies, we find that the performance is improved than before, but not dramatically. There is a significant linear positive correlation between the equity incentive level and corporate performance. And equity incentive has hysteretic quality which means the level of equity incentive will have significant influence after one year since it is put into practice. In this sense, equity incentive is more suitable for the long-term incentive system for the management of companies. Moreover, the competition in the companies from samples has significant impact on the corporate performance, which indicates that the greater the competition in the company is, the better the effect of equity incentive is and the faster the performance improves.The innovation of this paper lies in the following aspects.1.The novelty of research subjectSo far, domestic research of equity incentive mainly focus on all the listed or the stated-owned listed companies. Only a few studied the relevant issue about private listed companies. However, since the implementation of equity incentive system, the enthusiasm of private listed company is far higher than that of state-owned enterprises. With the constant improvement of equity incentive regulation system, the private listed companies have more motivation to regard equity incentive system as a tool of long-term incentive. Therefore, this paper can provide both theoretical and empirical references for subsequent research.2.The novelty of the index of measuring effect of equity incentiveIn order to evaluate the effect of equity incentive, it is essential to measure corporate performance accurately. Most of previous studies use the financial indicators to reflect corporate performance. However the financial indicators are easily manipulated and usually ignore the shareholders’cost of capital and sometimes have endogenous defects which may result in significant deviation from the real value of company. If the financial indicators are used to evaluate the corporate performance, it is most likely that managers pay too much attention to improve the short-term performance rather than improve the real value of company, let alone the wealth of shareholders. As a result, this paper chooses the unit capital EVA and unit equity EVA to measure the operational efficiency of company’s capital and shareholder’s return on investment. EVA index can reveal the real value of company better. In this sense, the target of implementation of equity incentive is to improve the EVA of the company.3.This paper fully takes the time lag of equity incentive and interval effects into consideration while doing the empirical regression. Besides, with the combination of EVA index system, the regression results accurately reflect the effect of equity incentive in private listed companies at present in China.Due to the limitation of knowledge reserves and personal energy, there are still some deficiencies in this paper. Specifically, they are the limitation of research object, the lack of more sample data and no fully deliberation on the endogenous problem of equity incentive.