Equity incentive and risk taking: evidence from China

Abstract

PurposeChina has formally implemented equity incentive for more than 10 years; thus, a considerable number of equity incentive programs has entered the exercise period. This means that it is time to conduct a comprehensive analysis of the incentive effects of equity incentive throughout the whole implementation phase. The purpose of this paper is to examine the relationship between equity incentive, enterprise’s risk taking and risk decisions in China.Design/methodology/approachUsing sensitivity of executives’ wealth and stock price (Delta) to measure the alignment effect and using sensitivity of executives’ wealth and stock return volatility (Vega) to measure the risk-taking effect, this paper aims to empirically test the relation of equity incentive and enterprise’s risk taking and risk decisions.FindingsThe authors find that Vega is positively related to risk taking; however, this improvement was mainly reflected in the private enterprises rather than state-owned enterprises. In terms of corporate policy choice, the authors find that Vega is positively related to firm focus and leverage. But, they have not found that Vega can promote R&D investment.Originality/valueExisting studies have mostly concerned about the executives’ opportunistic behavior; however, analyses of the positive effect of equity incentive are limited. The authors use a combination of risk-taking incentives and alignment incentives to test the relationship between equity incentive and risk taking.