The Impact Of Equity Incentives On Inefficient Investments

Investment makes enterprise. There is no enterprises don’t need investment. Enterprises need the best investment scale. Any investment deviations from the optimal decisions are not conducive to long-term development of enterprises. Different from under-investment, over-investments are attracting more and more attraction at the high investment scale. Over-investment and under-investment are both inefficient investment, hunting enterprises’ income. Resources have being wasted by over-investment activity, and haven’t being used reasonably. Positive NPV investment is called over-investment, and negative, under-investment. Firms need to constrain the abnormal phenomena immediately, or they are hindering firms’ development.Separation of ownership and control lead to agency problems. Agency problems lead to agency cost; however, agencies cost are the root of inefficient investment. Equity incentives are born to solve the problem of agency. It was to be widely used in American firms since Mid-20 th century. As a new way to resolve agency problem, equity incentive has drawn more and more attention in the academic community about its usefulness.The first use of equity incentive in Chinese company was in 1990 s. The numbers of companies to complement equity incentives are also numbered for lack of formal regulations to guide and regulate. Simultaneously, it has hindered the development of equity incentives. Equity incentive measures for the administration of listed companies(trial), which rule Chinese listed companies in equity incentive plan, and with some studies, more and more listed companies implement equity incentive plan.There were little literature focused on study of under-investment and equity incentive, but over-investment was popular. In the condition of some companies implementing equity incentives, there exist data to study under-investment. This paper is based on Chinese listed company except growth enterprise market on the Shanghai and Shenzhen stock exchanges. And sample from 2011 to 2014 are used to do the empirical tests. This paper concludes that much heavier over-investment than under-investment exist in Chinese listed companies. Then, the interest gap between shareholder and executive are narrowed by the implementing of equity incentive. However, equity incentive doesn’t look like a wonderful way in governing over-investment for the lack of the mature equity incentive implementing environment. Furthermore, the existence of largest shareholder promotes the effect of incentive in inefficient investment because of its monitoring.This paper has the following two new viewpoints:Firstly, many literatures only examined the relationship between equity incentive and over-investment or under-investment. This paper examines the two aspects of inefficient investment with incentive, and covers the shortage of previous literature. Simultaneously, this paper adds the largest stockholder in empirical tests. The tests are good for confirming incentive implementing environment and improving its effects.Finally, some scholars taking management stock ownership as equity incentive. In fact, they are different. The implementing of equity incentive may lead to management stock ownership, but management stock ownership isn’t equity incentive. This paper makes up for the deficiency of those literatures by using sample of equity incentive.