The Relationship Between Equity Incentives And Earnings Management In Listed Companies

The stock incentive mechanism was first developed in the United States of America in the50’s of20th century. Then in the early1990s, this mechanism was introduced to China. With the processing of the Chinese non-tradable share reform for state-owned enterprises, the stock incentive mechanism is gradually advancing in China, the promulgation of series of laws provided huge policy support for equity incentive mechanism implementation. However, at the same time, because of the existence of principal-agent problem and information asymmetry problem under modern enterprise system, managers use information convenience and their control over the business to conduct earnings management behavior. Especially for the GEM in China, the earnings management phenomenon is more common. Therefore, doing the research of how to implement equity incentive mechanism and reduce the side effects of it on earnings management simultaneously, thus improving the equity incentive mechanism is a valued subject.The paper referred to the corresponding literatures of both domestic and foreign ones about equity incentives and earnings management, in this part include the concept of earnings management and its motivations, and the relation between equity incentivesnd earnings management. The next part is the analysis of present situation of equity incentives in Chines listed companies, and the theoretical analysis of equity incentives and earnings management, including the principles of equity incentives, the theoretical basis of earnings management and the introduction of several mainly used measurement methods of earnings management, then proposed four research supposes. After that this paper did the empirical study of the current problems of earnings management in China’s GEM. The paper reviewed the corresponding literatures, then analyzed briefly about its current situation in China and did some theoretical analysis on the relationship of equity incentives and earnings management. On the basis of these, the paper used the GEM companies that firstly released equity incentive mechanism as samples, using modified Jones model to calculate manipulated accrued profits, then after considering other possible values, including explanatory variables and control variables. Then using Excel and Eviews to do the empirical research. Finally, the paper explained the results of the research and provided corresponding suggestions.After the above analysis, the paper made following conclusion:the equity incentives really promote earnings management activity, the more incentives are, the higher level the earnings management will be; the level of restricted stock companies is higher than that of stock option companies; the waiting time has no significant effect on earnings management.On the basis of the above conclusions, the paper analyzed the reasons why equity incentives would lead to earnings management, mainly including the equity incentives plan itself has some drawbacks, information announcement during the equity incentives formulation is not enough, market imperfection, including capital market and manager market. Then the paper proposed several suggestions according to these reasons, including formulating reasonable and effective equity incentives plan, completing relative regulatory foundation, and building reputation mechanism of manager market.