The Unamortized Stock Option Expense And Earnings Management

On January1st,2006, the China Securities Regulatory Commission (CSRC) issued the Administrative Measures on Equity Incentive of Listed Companies, and equity incentive is widely used and gets significant development among China’s listed companies. It effectively reduces agent costs but at the same time probably triggers ethical risks of senior executives in the implementation, which causes the wide attention of scholars both at home and abroad. This article, with the listed companies of equity incentive from2006to2013as the study sample, analyzes the impacts of the unamortized stock option expense on the stock option grant day on the earnings management behavior of the grant year and the previous fiscal year and the next fiscal year.This article uses one-sample T-test and paired-sample T-test to study the direction and degree of the accrued earnings management and real earnings management of stock option in the grant year and the previous fiscal year and the next fiscal year. The research finds that:compared with listed companies without stock option, the management of companies with stock option is more likely to use real earnings management means such as "manipulated accrual profit" or abnormal operating cash flow to do downward earnings manipulation before the stock option grant. If reversal development of surplus appears in the grant year and the next fiscal year, the management would be more likely to do upward earnings manipulation. On the premise of the management of the company’s annual operative capacity, earning capacity, scale and governance factors in the industry, multiple regression is done to study the impacts of the unamortized stock option expense on the earnings management behavior of the grant year and the previous fiscal year and the next fiscal year. The research finds that:the unamortized stock option expense have negative impact on the real earnings management in the previous fiscal year of the stock option, but not that significant on the accrued earnings manipulation. Further research shows that in the previous fiscal year, the management of listed companies prefers to manipulate the abnormal cash flow to do real earnings management; in the grant year and the next fiscal year, it prefers to do the upward accrued earnings management and the real earnings management. Downward manipulation before grant and upward manipulation after grant are more obvious when the grant year is the exercise performance evaluation year.The empirical findings on the basis of empirical results can help, we should improve the system of stock option incentive, on the one hand, regulators should strengthen the supervision of the stock option incentive system, especially the definition and amortization of the prepaid option premium to give enough attention; On the other hand, we should not only focus on whether the stock option effective implementation, but also focus on whether stock option incentive system formulation is reasonable.