The Research On Clustering Phenomena Of Listed Company Performance From The Perspective Of Equity Incentive

Since the implementation of the equity incentive regulation in 2006,equity incentive has been adopted by a constantly growing number of listed companies,often with highly profitable returns.Simultaneously,equity incentive has assumed the role of compulsory inclusion within any executive compensation package.However,Lv et al.(2009)found that equity incentive implemented by listed companies have both incentive effect and welfare effect.A well-designed equity incentive motivates the manager to seek maximum benefits for the company.Potentially,a negative equity incentive package could be abused by the executive in turning it into an instrument for personal gain,which may jeopardize the achievements of the company's long-term interests for short-sighted interests.Having said so,we have to place in evidence that achieving the aimed target in vesting conditions is fundamental in the designing of an equity-based incentive contract.Previous studies show that,due to the presence of target ratcheting effect in target performance of equity incentive(that is to say an excellent performance may result in more demanding target performance in the future),managers are quite uninterested in going the extra-mile,if and when,they over-take the required targets.However,the executives are well aware that failing to cover the required performance standards might be hindering to the equity incentive.This is the main pushing factor empowering the managers towards exceeding the required performance standards demanded by the company.Having exposed the above observations,this paper argues that the reported performance of listed company will cluster around the target performance,and the number of listed companies whose reported performance exceeds target performance will be much bigger than the number of listed companies did not achieve target performance.This paper uses data of target performance from the listed company equity incentive plan,released since 2006,along with the reported performance to create relative indicators of performance.This study used three tests on the distribution of the relative indicators to find empirical evidence of performance manipulation in the listed companies.The first test is based on McCrary(2008)'s method,which was designed to detect the manipulation of the running variables.The second test is based on Bollen and Pool(2009)'s method,which was designed to detect the breaking points in the distribution of hedge funds' performance.The third test is a so-called bootstrapping exercise.The full sample analysis shows that the manipulation exists in all three performance indexes(net income,revenue and ROE).But the listed companies are more inclined to manipulate revenue rather than ROE.Also this reflects that revenues can be most easily manipulated,while ROE result quite complicated in being manipulated.In order to study whether the heterogeneity of listed companies affects the manipulation of performance,this paper then subdivides full sample into subsamples by the nature of the listed company(state-owned or private),industry and the scale(measured by market value and revenue).The results of subsample analysis show that the manipulation of these three indicators exists in both state-owned companies and private companies.State-owned companies are more likely to manipulate revenue to achieve the target performance than private companies.The study also found that the manipulation of ROE is not significant in state-owned companies,while it is more common in private companies.The subsample analysis also shows that the most serious manipulation behavior of net income may be found in the construction industry,while it is the least significant in wholesale and retail industry.Software and I.T.services industry have less control over revenues.ROE is the least manipulative in every industry.In terms of scales,the subsample analysis shows that the scale of the market value does not affect the manipulation of net income and revenue of the listed companies,but revenue scale might increment this kind of manipulation.Interestingly,we found that,if sorted by market value or revenue,the manipulation of ROE is not significant in the top 20% ranking scale of listed companies,but it's significant in listed companies in the lower 20% ranking of scale.This may imply that an increase in scale will add difficulty in the manipulation of ROE in listed companies.