Research On The Relationship Between Equity Incentive And Earning Management In Different Product Market Competition

In modern enterprise system,there is a principal-agent problem between between owner and operator because of the information asymmetry.In order to solve the principal-agent problem,equity incentive mechanism arises at the historic moment.However,with the emergence of financial scandals such as Enron and world communications,the effectiveness of equity incentive has been widely questioned.Some scholars think that equity incentive establishs an interest sharing and risk sharing mechanism between shareholders and executives which can restrain executives' earning management behavior.Another part of the scholars believe that equity incentive will cause executives' earning management behavior to increase the probability of stock options and gain higher returns which is harmful to the long-term development of enterprises.In view of the above argument,we think that the former scholars mainly study the direct relationship between equity incentive and earning management,and ignore how product market competition influences the relationship between them.Because government intervention and the reform of economic marketization is gradual and gradient,there are significant differences in product market competition between different industries in China.Based on this,this paper constructs an analysis framework which includes equity incentive,product market competition and earnings management.Using data from 2007 to 2016,the paper focuses on how product market competition plays a regulatory role between equity incentive and earnings management,whether there is a difference under different stock market cycles.The results show that equity incentive has an incentive effect,which can significantly reduce the degree of earnings management;product market competition has a positive regulating effect on equity incentive effect,the product market is morecompetitive,the equity incentive effect is stronger;The regulating effect is stronger in bear market,which means product market competition has stronger regulating effect on equity incentive effect.The above conclusions imply that product market competition will have a huge impact on the role of equity incentive.Therefore,from the perspective of enterprises,enterprises should consider the product market competition and stock market environment when they take stock incentives.When the stock market is in a bear market and the enterprise faces fierce competition in the product market,it should give executives a higher level of equity incentive.From the perspective of the government,the government should further deepen the reform of the market of our economic system,reduce the intervention on the market,and improve the competitive machine system of the product market.