The Impact Of CEO Stock Option Incentives On The Earnings Management Of Listed Companies

Currently, stock option incentive is the most favored incentive for companies. It is anequity incentive and a long-term incentive.Stock option incentive has two types familiarwith people, those are traditional type and performance-based type. This paper from theperspective of predetermined performance targets determine whether stock options can beexercised or not examines whether CEO stock option incentive can affect earningsmanagement of listed companies in the economic condition of our country.Firstly, this paper review the related conclusions of papers which research the stockoption incentive and earnings management, aiming to analyzing the factors in stock optionincentive which results in earnings management. Then,from the perspective ofcharacteristics of performance-vested stock option and the current situation of ourcountries’ CEO performance-vested stock option, this paper analyzes the relation betweenperformance targets and earnings management to set up null hypothesis between them.The sample companies of this paper consist of listed companies which are succeededin implementing CEO stock option incentives from2006to2012.The firm-years of thesecompanies are divide into four groups, that are incentive-company firm years,incentive-company non-assessing firm years, incentive-company assessing firm years,incentive-company assessing firm years which achieving performance targets.This paperuses independent samples T-test, regression analysis, paired samples T-test, paired samplesregression analysis to test the null hypothesis and find that:(1)the ROE of incentivecompany is higher than the non-incentive company and that the CEO stock option incentiveis mostly implemented in the strong profitability companies;(2)discretional accruals inincentive company assessing firm years and incentive company assessing years whichmeeting performance targets are not significantly high, so the accounting performanceapplication in the performance targets of performance-vested stock option do not result inthe accrual upward earnings management of CEO;(3)abnormal operating cash flow inincentive company assessing firm years is significantly higher and CEO may manipulateearnings downward in years which meeting the performance;(4)performance targets inCEO stock option incentive maybe too low and CEO stock option incentive system existswelfare effect, so the incentive company should increase the performance targets level.