Research On Earnings Management Of Chinese Listed Companies That Implement Equity Incentive Plan

In the context of modern enterprise system, principal-agent problems caused by the separation of ownership and management are increasingly prominent. Equity incentive system can reduce agency costs and solve principal-agent problems to a certain content. Equity incentive is a long-term incentive system, retaining and stimulating principal employees by awarding them conditioned equities in order to unify benefits of corporation and employees. In 2006, "Equity incentive regulations of Chinese listed corporations(Trial)" promulgated by China securities regulatory commission. Now more and more companies apply equity incentive system into their corporate governance. However, academic circle holds different views on the influence of equity incentive to company performance. It may not stimulate employees to work hard through low incentive degree; it tends to motivate the executives’ earnings management by high incentive degree. In Chinese capital market, imperfection of accounting standard, deficiency of corporate governance and dependence of external audit may lead to the manipulation of accounting profit by executives for gaining personal interests.According to the above conditions, this paper uses Chinese listed companies data and then researches behavioral characteristics of Chinese companies that implement equity incentives and manage earnings by theoretical and empirical analysis. Firstly, this paper reviews the domestic and foreign literature about equity incentives and earnings management. Then this paper indicates research contents, research approach and innovation of this paper. And then we analyze the theoretical logic of earnings management by equity incentive companies through three aspects of objective conditions, motivation and means. Afterwards, this paper selects Chinese listed companies that implement equity incentives in 2014 as a sample and uses the modified Jones model to get discretionary accruals which measure the degree of earnings management. After that, we analyze the characteristics of samples’ earnings management before and among the period of performance evaluation. At the same time, we discuss influence factors of equity incentive companies’ earnings management level in terms of incentive mode, incentive level, exercise period, incentive object and corporate governance.Through above research, we gain the following conclusions:the earnings managements level is positively related to share options before and among the period of performance evaluation. Chinese equity incentive companies tend to reduce earnings before the period of performance evaluation and increase earnings among the period. As to influence factors of equity incentive companies’earnings management level, we find that earnings management level of equity incentive has no relations with the difference of incentive mode and number of incentive object. However, it is significantly positive related to incentive degree and negative related to exercise period. Besides, equity incentive companies whose incentive object including CEO or CFO tend to get a higher degree of earnings management. According to above results, we come up with related policy suggestions, including improvement of regulations, formulation of effective equity incentive scheme and developing the level of corporate governance. In the end, this paper explains research limitations and expectations.