The Impact Of Equity Incentive Contract Design On Managerial Entrenchment

The conflict of interest is focused on the following: managers rely on professional management knowledge to gain the right to participate in decision-making discussions, using of long-term dominant business to accumulate absolute influence, with the help of shareholders less participation in the daily business convenience to deepen the information asymmetry between each other. Driven by motivation of pursuing their own interests, managers implement the pursuit of interest behavior to maximum their benefit and ensure the stable position by management and major decision, namely the managerial entrenchment behavior.The managerial entrenchment behavior will lead to short-sighted behavior, excessive investment and other bad business practices, long-standing will harm the healthy and stable development of enterprises.In theory, equity incentive can improve shareholder returns through the use of manager self-interest motive which chases their return on equity. As one of the shareholders of the company, and in order to obtain a stable return on investment, institutional investors have the motivation to play the role of "Shareholder Activism", participating in corporate governance, as well as supervising the major decisions of the enterprise.Based on the theory of principal-agent theory, human capital theory, incomplete contract theory, information asymmetry theory and effective market theory, this paper puts forward the theoretical analysis framework of institutional investor holding, equity incentive contract design and manager management defense behavior by reviewing the related literature analysis of equity incentive contracts, managerial entrenchment and institutional investors governance. On the basis of the above, the regression analysis is carried out by using the multivariate linear regression method from two angles of normative research and empirical research. This paper measures the degree of managerial defense from the aspects of manager contribution and interest appropriation.When the manager contribution rises while the manager interest appropriation decreases, the manager's management defenses are defined as declining.First,this paper analyzes the influence of incentive intensity, incentive period, grant price and performance condition on manager contribution and interest appropriation in the design of equity incentive contract. Then analyzes the influence of institutional investors between the incentive intensity, incentive period, grant price, performance condition, manager contribution and interest appropriation. The results show that the incentive intensity, incentive period,performance conditions are positively related to manager contribution, and negatively related to manager interest appropriation. That is, the incentive intensity, incentive period, performance conditions and manager management defense is positively related.The grant price has no significant effect on the manager contribution and interest appropriation.The proportion of institutional investors' shareholding has a positive adjustment effect on the relationship between incentive intensity, incentive period, performance condition and manager contribution, and has a negative adjustment effect on the relationship between incentive intensity, incentive period,performance condition and manager interest appropriation. That is, the proportion of institutional investors' shareholding has a positive adjustment effect on the relationship between incentive intensity, incentive period, performance condition and managerial management defense. The positive adjustment of the proportion of institutional investors' shareholding on the granting price, manager contribution and interest appropriation did not pass the significant test.This paper puts forward the following suggestions to alleviate the managerial management defense: to rationalize the design of the equity incentive contract by increasing the incentive intensity of the stock, prolonging the incentive period, raising the price and performance conditions. Appropriate introduction of institutional investors and increase the size of institutional investors to improve the external supervision mechanism.