State-owned Holding,Equity Incentive And Earnings Management

After the reform of state-owned companies in the 1990 s, China kept exploring the establishment and improvement of a modern corporate system; since 2000, one of the key reform of state-owned enterprise is the modification of management remuneration in state-owned enterprise; after 2006, China formally introduced sophisticated management equity incentive system in Western countries which has been used to overcome the presence of state-owned enterprise management incentive problems and lack of long-term incentives. Furthermore, it helped to find the entry point of deepen the reform of state-owned enterprises. It can be said that the use of equity incentive system really makes a differenceHowever, researches confirmed that it will also lead to self-interest problems of the management equity incentive earnings management. Because China’s state-controlled listed companies are the restructured enterprises mostly, imperfect corporate governance structure, lack of supervision of state-owned corporate shareholders and the expansion of management authority are obviously issues. Moreover, the equity incentive can easily lead to earnings management which seriously affecting the function of equity incentive system.In this paper, literature research, normative analysis, case studies and other methods to analyse the management equity incentive plan and earnings management behavior of Qingdao Hisense Kelon which is the state-controlled listed companies under the control of the SASAC.The case focused on Hisense Kelon equity firm control structure, equity incentive plan design, traces of earnings management, especially put attention on key points, actual exercise date, other financial data period and changes in capital market data combined with the contents of the equity incentive plan, from announcement to implementation to exercise equity incentive plan. Management used the time point on restructuring and incentive plan for reserving the future earnings,and through profit manipulation around the grant date,they could acquired the optimum executive price.Then in the first half of period,they hidden profit to smooth earnings and exploited nested design to decreasing difficulty of exercising.Yet in exercise schedule,they controlled earnings and selected the exercise time point to reduced the burden of taxation.After examination, the Hisense Kelon’s equity incentive plan has been considered to have indication of management control which proved the program does lead to management’s earnings management issue.According to the analysis, the paper points out the Hisense Kelon equity incentive plan problems, such as low unreasonable vesting conditions, lacks necessity, low earnings quality of equity incentive and inappropriate corporate governance structure. To address the issue, the paper has proposed to optimize the equity incentive program design, exercise price ladder and diverse assessment indicators combined with China’s reality. And then improve corporate governance structure and strengthen the role of both Board of Supervisors and independent directors.