Research On Marketization Progress, Equity Incentive And Earnings Management

With the increasingly decentralized share of modern corporation and the increasinglycomplex development of management technology, as one of the essential resources ofbusiness, human capital has taken more and more attention, therefore companies around theworld rolled out various forms of stock incentive in order to motivate senior management.The development of stock incentive in China is relatively backward, but after the state sharesale reform and the issue of the Listed Company Equity Incentive Management Regulation in2006, China’s stock incentive from the system and practice has a great deal of improvementand development in both the system and practice. The use of stock incentive has increasinglywidespread in China. The Third Plenary Session of the18th Central Committee of theCommunist emphasized the reform of state-owned enterprises as a key for economic systemreform, equity incentive, as a way of activating enterprises is a major concern.The purpose of the implementation of equity incentive to senior executives is to unifyinterests of senior and those of shareholders, is to reduce the agency conflict. But whether theequity incentive promotes or inhibits earnings management is still a controversy in academy.If equity incentive increases earnings management, those results violate the original intentionof equity incentive, while equity incentive becomes a tool for senior executives to grabinterests from shareholders. So it is necessary to discuss the relationship between equityincentive and earnings management.Due to the unbalanced regional economic development in our country, the externalgovernance environment is different from area to area. There are less existing studies studyingrelationship between equity incentive and earnings management based on marketization indifferent areas. Some studies only choose one of common stock, stock options and restrictedshares held by the executive to measure the degree of equity incentive, not threecomprehensive consideration; Some studies take the absolute value of earnings management,not distinguishing it between plus or minus, but different symbols of earnings managementcorrespond to different motivation of earnings management. so this article hopes to considervarious kinds of shares and options held by the executive to measure the degree of equityincentive, and not take the absolute value of earnings management, in order to obtain moreaccurate conclusions.Based on a great amount of related literatures and combined with the Practical situations,the article start with the logic analysis, then make the demonstration studies about them. Fromthe differences examination between incentive samples and paired samples this article finds:on the standard year, listed companies which implement equity incentive significantly reduceearnings management; on the first assessment year, listed companies which implement equity incentive significantly increase earnings management. Then this paper selects the surplus ofearnings management of incentive samples to those of paired samples as the upward earningsmanagement result of equity incentive, and selects listed companies of which exercise price ishigher than closing price on the first assessment year as regression samples, study therelationship among marketization process, equity incentive and upward earningsmanagement, finding that equity incentive positively related to the upward earningsmanagement; marketization process positively related to the upward earnings management;marketization process accelerates upward earnings management caused by equity incentive.The results above show that senior executives can use equity incentive and earningsmanagement to realize their own interests, this provide evidence to draw up equity incentiveplans.