Research On The Effect Of Equity Incentive On Earnings Management Based On Life Cycle Theory

With the development of modern economy, the ownership separate form the operation, which generates a principal-agent relationship. Due to the asymmetric information between owner and operator, it brings about the principal-agent costs. In order to combine the interests of the owner, operator with corporate interests, in the west, a kind of long-term incentive mechanism were produced, which is equity incentive. The long-term incentive system is a incentive contract which indicates that the company executives can enjoy some of the company’s equity, involves in the company’s major decisions, and joint adventure, which synchronize the interests of the individual and the company interests, to maximize the value of the company. But it also produces a new problem. Because equity incentive line weight will have certain rights conditions—there will be a certain quantitative indicators, such as the net assets income rate, and so on. Executives under the temptation of equity incentive, it may use some improper means of earnings management, in order to make their own business performance indicators of exercise. But the emergence of this situation and the company’s stage of life cycle are closely linked. In different life cycle, its scope of business, profit ability, debt paying ability, operation ability, the implementation of corporate strategy, organizational structure and supervision system will be to change of the life cycle. Even the power of executives, the contract with the company are also varies with the life cycle. So this article is based on life cycle perspective to study the effect of equity incentive of earnings management.In this paper, the first part is the introduction which Mainly introduces the selected topic background, significance, literature review, and the innovation points. The second part is the basic theory, which introduces the meaning of equity incentive, the measurement method of earnings management, the classification method of the life cycle. The third part is the empirical design, which puts forward the assumption, defines the explanatory variables, the explanatory variables, control variables, and the empirical model. The forth part is the empirical analysis. First is descriptive statistical analysis, intuitively describe the characteristics of each variable; Secondly the Pearson correlation analysis, to avoid collinearity’s influence on the linear regression; When been not distinguished between the life cycle, the regression analysis was carried out on the whole sample, to verify the relationship between equity incentives and earnings management; And a hierarchical regression analysis was carried out to verify the regulating effect of life cycle; Again grouped regression analysis of growth and maturation stage; Finally has carried on the robustness test. The fifth part, according to the above analysis, offer the conclusions and recommendations.Through the theoretical analysis and empirical test, we verified the adjustment affect of life cycle between equity incentives and earnings management. And the growing company, equity incentives is significantly positively related to earnings management, the mature company, equity incentives is not significantly negatively correlated to earnings management. According to this conclusion, we can carry out appropriate equity incentive in the different life cycle, so as to realize mutual benefit.