Research On The Relation Among Equity Incentive Plan’s Revision, Choice Of Equity Instrument’s Pricing Model And Earnings Management

As the separation of ownership and management, the principal-agent problem comes up. Would the equity incentive mechanism be optimal contract to solve the principal-agent problem and make shareholders and executives become a community of interests? Or it would become a method for executives to maximize their own benefit under the self-benefit motive and asymmetric information. As a long-term compensation mechanism, equity incentive mechanism is widely applied to solve the principal-agent problem between shareholders and executives in recent years. However, there are still problems existing in the process of the equity incentive, such as incentive shortage, earnings management induced by equity incentive, short-term behavior and opportunistic behavior of executives, market timing behavior and information disclosure and so on.To discuss about the earning management in the process of equity incentive based on the case of Vanke’s stock option incentive plan from 2010 to 2014, the biggest difference between this passage and previous studies is that we try discuss the motive and methods of the earning management in the process of Vanke’s stock option incentive by comparing the difference of amortization before and after equity incentive plan’s revision and under different equity instrument’s pricing models. We find executives could influence amortization and proportion of each period by revising the equity incentive plan or choosing equity instrument’s pricing models. And this will change accounting profit and make vesting conditions more easily be achieved. The paper analyzes the motive from several aspects, including the self-benefit motive and asymmetric information, the pressure from Vanke’s executives frequent demission, the uncertainty of future returns, rigorous vesting conditions, and the pressure from national economic policy. We also analyze the methods of earning management used in the process of equity incentive, for example, choice of equity instrument’s pricing model,equity incentive plan’s revision, market timing behavior and information disclosure and so on.Based on the analysis of Vanke’s case, we do a further study by making the empirical variables regression analysis to draw a general conclusion and provide guidance for practice. Collecting the date of Chinese A-share listed companies on main board which once announced and implemented equity incentive plans from 2006 to 2014 by handcraft, we find that a significant positive correlation existed between equity incentive plan’s revision and discretionary accruals, and it prove the point that those companies which once revise the equity incentive plan would tend to manage discretionary accruals. We also find that companies choose different equity instrument’s pricing models in the fair value valuation will make a difference to accrual earnings management. These ones which use Blake-Scholes model, binomial model or closing price will tend to reduce discretionary accruals, and these ones which don’t make the equity instrument’s pricing model used public will tend to manage discretionary accruals.Finally based on the analysis of the case of Vanke and the empirical regression, the paper is trying to provide some suggestions and guidance for equity incentive mechanism in future. We wish to perfect the corporate governance structure, promote the equity incentive mechanism’s design, enhance the relevant regulations issuance and information disclosure, and improve the comprehension about equity incentive and the ability in accounting.