Corporate Internationalization, Stock Price Informativeness And Equity Incentive Effectiveness

In modern corporate system, the ownership and management rights has been separated and it makes the owners disassemble the function, managers obtain control of the corporation and to fulfill the arranged authorities and responsibilities. However, managers tend to pursue the personal gains under the goals of maximizing the benefits of their own, carry out opportunistic behavior such as earnings management to gloss over the company’s performance and inefficient investments to gain private benefits, it damages the owners’interests seriously, produces agency problem has yet to be properly addressed. Based on this, the theory of optimal compensation contract was focused by people gradually, Jensen and Meckling(1976) gave a suggestion to solve the agency problem:closely connect the interests of owners and manages, link managers’ compensation and corporate performance, under the goal of maximizing the owners’ benefits, managers would operate continuously and effectively. Owners will stake to managers, and further, managers are also the owners, the risks and earnings move together, equity incentive in overseas listed company can never be replaced among various compensation incentive modes. As non-tradable shares reform was fixed in the past, and now it is being improved in our country, capital market gets further reformed, has gradually been open to other countries, also gets stable development, achieves the goal of best A-shares circulating, these provide a certain basis to implement equity incentive in our country. Equity incentive are just aroused recently in China, the existing part of equity incentive study sustains the effect of the equity incentive. However, the previous conclusion is suspected by some papers with great evidences. Perhaps the functions of equity incentive are not the same in different corporate patterns. As a result, owners need to make reasonable compensation incentive contracts according to the particular features of the listed company for the purpose of reinforcing the degree of managers’ efforts, achieves the "win-win" situation between the interests of the owners and managers. China has executes the essential national policy of reforming and making open to the other countries. To implement the development policy of "going out" is also the key measure for China’s springing up. internationalization is also evitable for Chinese listed companies. Corporate internationalization can get more market access opportunities and obtain more resources, break through the advantages of industry development, gain advanced knowledge to carry forward the international strength of China’s companies. But international operation also increased the uncertainty of business and the risk brought by the macroeconomic fluctuations from foreign markets, managers most likely damage the interests of the investors because of the severe information asymmetry, the agency problem is particularity not alike to the domestic business. To solve this problem, equity incentive can be a better choice that it connects the common wealth between shareholders and managers through the share price movements. However, in the international operation of enterprises, the effectiveness of equity incentive is deserved to be deeply discussed.A recent study found that managers’incentive has great relevance with market microstructure. Market microstructure theory is that the stock market integrates of the company’s business information and leads to the formation of share price, stock may have integrated information shows the degree of managers’behavior and managers’efforts. Then shareholders can use the information to formulate the optimal compensation contract to a better excitation of managers. In addition, the market can sent the positive signals of improving corporate governance structure by transferring stock information, maximizing shareholder interests is the goal of managers’hard working. As a result, the optimal compensation contract is influenced by the microscopic structure of the market. Equity incentive is a means of performance evaluation in view of market, to a large extent whether it is effective depends on the connection between stock price and managers’efforts, whether stock price has information content, whether the stock price can reflect the characteristic information of enterprise. Stock price informativeness probably has a significant meaning between the corporate internationalization and equity incentive effect, it is necessary to use it as a single variable to study. Does the deepening of corporate internationalization improve equity incentive effect? If there is, what is the inner mechanism? What kind of role does share price information content play in this mechanism? These problems have been a lack of empirical necessary evidence to explore and inspect.In view of the brief analysis mentioned above, under the circumstance of our country, this paper chooses empirical data of A-share listed company for Archival research. This paper may discuss from the following train of thought to reply the above three issues:(1) How does the deepening of corporate internationalization influence the equity incentive effectiveness;(2) To clue the inner path of this influence, whether does international operation impact on the equity incentive effectiveness by stock informativeness, furthermore, whether does the stock informativeness has certain intermediary role between the international operation and equity incentive effectiveness.The main contents of this essay are made up of five chapters:The first chapter:introduction. This part mainly introduces the research background, research significance, summarizes main contents, and then introduces the research method, research framework and innovation points in detail.The second chapter:literature review. This chapter reviews the theory combines with domestic and foreign existing classic and frontier literature about enterprise internationalization management, stock price informativeness and equity incentive effectiveness at length, understands systemic research ideas, learns some research methods.The third chapter:theoretical analysis and hypotheses. Based on the optimal compensation contract theory and the market microstructure theory this essay makes three research hypotheses, tries to define major variables specifically, shows some instructions about the data selection and sorts the data preliminarily.The fourth chapter:the empirical analysis and research results. We make descriptive statistics and correlation analysis based on the sample data, construct the results preliminarily. Establish regression models to do some multiple regression analysis on the sample data using Stata statistical software, the related research results are described. In addition, this paper uses some inspection methods including PSM to explore the robustness of research results.The fifth chapter:conclusion, policy recommendations and inadequate. This chapter fully expounds and tried to make an acceptable conclusion of this article, advances some policy recommendations in view of real problems faced by the corporate internationalization in China, in the end, and also points out limitations based on the research content and research methods in this paper, makes a brief outlook for later study.A-share listed companies are taken as samples from2008to2011in China, this paper empirical explores the mechanism about the impact of enterprise internationalization on equity incentive effectiveness through price informativeness, conclusions are shown generally by two points:First, the deepness of international operation in China’s Listed companies exacerbates the agency problem possibly further to decrease the equity incentive effectiveness. It is on account of the internationalization of enterprise operation is regional diversity, regional development business causes the business process different hugely with respect to aspects of geography, culture and institution, the complexity greatly increases the supervising costs to managers in international companies, producing some problems such as information asymmetry and uncertainty of the external management, leading to increased possibility of "moral hazard" and "adverse selection". Although owners grant some equity to managers, managers’risk is still less than the owner’s, the asymmetric information may lead to personal income is greater than the given equity incentive income, managers may damage the interests of internal and external investors, equity incentive is failure with the wide spread of corporate internationalization.Second, focusing on further research about the mechanism of the influence procedure from corporate internationalization to equity incentive effectiveness, this paper discovers that stock price informativeness plays a certain intermediary role between the two factors. Specifically, the stock price informativeness is significant to promote equity incentive effectiveness, corporate internationalization weakened the equity incentive effectiveness by lowering the price information content, stock price informativeness plays an obvious intermediary role between enterprise internationalization and equity incentive effectiveness. Indeed, internal governance may be false sometimes, market microstructure theory is so expressive that it proposes an idea that stock price informativeness provided by external market mechanism is beneficial to the managers’compensation incentive contracts. Corporate internationalization increases investors’supervising costs to the managers, leads to asymmetric information, in the stock market information is more opaque, this will undoubtedly increases investors’costs of searching for firm character information and reduces the motivation of searching for the company’s quality information, company information is hard to be aggregated into the stock price when there has been a variety of market transactions leading to a drop of stock price informativeness. Market microstructure theory proposes an idea that share price informativeness provides a significant instruction to effectively fix the optimal compensation contract, and we can say compensation incentive contract is more effective with the richer of stock price informativeness. So, the function from international operation on stock price informativeness transmits to the effectiveness of compensation incentive contract finally, as a result, international operation cuts down the stock price informativeness, lowers the equity incentive effectiveness.In this paper, the main innovations and contributions are drawn:First, this paper reveals the Chinese enterprise internationalization management’influence to the effectiveness of the managers’ equity incentives in a new perspective combined with the optimal compensation contract theory and stock market microstructure theory. Specifically, this paper not only focuses on the influence on equity incentive effectiveness from international operation, but also on the internal mechanism, explores the function of stock price informativeness. In the perspective of internationalization, we expand the optimal compensation contract theory and the market microstructure theory, enrich the research literature.Second, this article explores the research content in detail from the nature of different property rights, profoundly compares the mechanisms of functions from corporate internationalization to managers’ equity incentive effectiveness under different business categories. Previous research recognizes that the state-owned enterprises could not bring into play the effect equity incentive, this article approves the different conclusion, the internationalization engagement breaks through some monopoly profits of state-owned enterprises in the domestic market by changing the prosecution environment, to some extent, the design of inner incentive may be greatly improved in this situation. Incentive mechanism design flaws is not the cause of the failure of equity incentive, the real reasons are the high degree of supervision costs and low degree of stock price informativeness produced by the complex economy environment faced by further development of internationalization corporation. This essay supports internationalization strategic since the18th of the CCP by certified testimony.Third, the essay supplies empirical testimony to deepen the understanding of enterprise internationalization management consequences, although equity incentive exist some shortcomings and problems at present in the international operation, the directions of improvement and emphasis differ between private and state-owned enterprises. Based on this, this article provides the policy suggestions and enlightenment in the international operation to prevent the risk, and to rationalize international operation problems in the process of management.Fourth, the author chooses research methods have certain characteristics in writing. We use the mediation three-step method to prove the idea that stock price informativeness has some intermediary function; we also apply propensity score matching method and heckman two-stage method for robustness test.The limitations of this essay are mainly summarized for four points:First, we only use equity incentive to measure the compensation incentive, do not consider other compensation incentive ways. Compensation incentive contracts have a variety of forms, for instance monetary remuneration, expense in-office, equity incentive and the political promotion, etc, this article only takes the equity incentive into consideration to measure the PPS, does not investigate whether international operation eventually impacts the effectiveness of other compensation incentive contracts, stock price informativeness is still inevitable and essential in the internal mechanism, these problems still need to be talked about in the future.Second, the variable metric has certain defects. The measure of corporate internationalization is relatively single, this paper uses the sales income outside China mainland divided by total sales revenue to measure enterprise international operation, the single internationalization index may not fully reflect all the characteristics of corporate internationalization. The equity stake is a rough measure of equity incentive of managers, it is hard to do our research based on specific equity incentive sample at present limited to the data availability of detailed equity incentive plan and the size of the sample. Researchers will further robustness test on this issue when the sample size is enough.Third, this article uses propensity score matching method and heckman two-stages method overcomes the endogenous to examine the results, can’t eliminate all influences between variables, there are still some deviations in statistical test, the empirical results need to test by better method.Fourth, the author collects data manually in public financial statements to calculate index of corporate internationalization, possibly there are some mistakes and carelessness during collection process, in addition, public financial statements may have some misstatement, this may have some negative impact on the empirical results.