The Empirical Research Of Relationship Between Stock Incentive And Earnings Management

Stock incentive impact the agency problem between senior management and stockholder in two ways. On the one hand, stock incentive can stimulate senior management to work harder for the interest of stockholder, in this way, agency cost will be lower and company performance will be better; However, on the other hand, stock incentive may induce senior management to conduct earnings management for personal interest. Therefore, stock incentive is a double-edge sword, its positive effect for company performance depend on the corporate governance.For the public listed companies in British and America, decentralized ownership structure lead to the agency problem between management and stockholder, in order to decrease the agency cost stockholder must give agent some incentives to diminish interest divergence, so the stock incentive was introduced. While in other countries, the ownership structure was high-centralized, for self-interest, major stockholder will supervise management, so the agency cost between senior management and stockholder is lower. Corporate governance condition in China is different from other countries, state-owner company is the majority, although they have high-centralized ownership structure, the vacancy of major stockholder results in "inside holder", which will worsening agency problem. In state-owned companies, senior management has motive and capability to conduct earnings management. Senior management will conduct negative earnings management before the announcement of stock incentive plan, in order to decrease the authorized price. While in the private-owned company, major stockholder has will and capability to supervise the behavior of senior management, guarantee the positive function of stock incentive.The article give three hypothesizes based on the theory analysis:(1) The listed company conduct negative earnings management before the date of stock options announcement.(2) In state-owned company, the degree of negative earnings management is significantly higher than private-owned company.(3) Through the measurement of company performance, the corporate governance effect in state-owned company is worse than private, which express on the positive degree between stock incentive and company performance.In order to test the relationship between ownership nature and earnings management behaviors in stock incentive, the article use the listed company has conducted stock incentive in A-share as the sample, examine the corporate governance effect of stock option and research the earnings management during the option, and in the further way, use company performance to measure the corporate governance effect of stock incentive under different nature of stock-owner. The empirical results showed that:(1) Corporate governance mechanism will impact the effect of stock incentive, under imperfect corporate governance, the stock incentive may increase the agency cost between senior management and stock-owned, induce earnings management problem.(2) The high-centralized ownership structure of state-owned company will produce "Inside-control" as the vacancy of stock-owner, for comparison, the major stock-owner of private company has strong motivation to supervise the behavior of senior management, which will lower the agency cost between management and stock-owner. As a result, compare to the private company, senior management has stronger motivation to conduct earnings management in the stock incentive, and the extent of earnings management is stronger.(3) The worse agency problem in state-owned company induce the earnings manage behavior of senior management. Therefore, the positive effect of stock incentive in state-owned company is weaker for state-owned company.Based on the research result, the article give five policy advices:(1) Improve the corporate governance structure and strengthen the management market.(2) Better the ownership structure of state-owned company, promote the preferred stock.(3) Perfect the related law and policies of stock incentive.(4) Improve the accounting standard.(5) Build effective outside audit.The innovation of this article is:(1) In prior researches of stock incentive, mainly studied the impact of stock incentive to earnings management, this paper thought the effect of earnings management to stock incentive in opposite direction.(2) The prior research found the positive earnings management after the stock incentive announcement, this paper found the negative earnings management before announcement, explain the new method of senior management to manipulate authorize price.(3) Based on the corporate governance condition in China, from the view of ownership nature, the article disclosure the impact of ownership nature on earnings management extent and positive effect for stock incentive, widen the research of agency problem.