Equity Incentives, Investor Investigation and Private Information Arbitrage

Abstract

Whether the equity incentive plan can improve the information efficiency of the capital market is an important part of the research on the economic consequences of equity incentives. Lots of literature has pointed out that equity incentives as the internal corporate governance mechanism can alleviate information asymmetry and reduce supervision costs. But can the implementation of equity incentives attract more investors to become informed traders, thus affecting the efficiency of capital market information? As far as we know, the answer to this question is not clear. On the one hand, the equity incentive plan usually contains the information that the management is working harder, which may change the company’s value, so it will attract more investors to pay attention to it; on the other hand, equity incentives will link the management’s wealth with market performance. And the company’s market performance depends largely on the information the investor has, so the management which is motivated by equity has incentives to release more information to investors. Investor investigation, as one of the information disclosure systems of listed companies in China, provides external investors with a channel to understand the information of listed companies, and it also helps the management to disclose more private information to external investors. Therefore, investor investigation can bring more informed transactions, and thus promote the release of private information, which ultimately leads to a smaller space for private information arbitrage. Based on the data of the Shenzhen Stock Exchange investor interaction platform, this paper examines whether equity incentives will attract more investors to investigate and whether the private information arbitrage space is lower. The empirical test results show that after the implementation of equity incentives, the company has more investors to investigate, and the company’s private information arbitrage space is also lower. This shows that equity incentives can promote the exchange of information between companies and investors by combining management interests with market performance, and improve the information efficiency of the capital market. The test results of the mediation effect show that the reduction of the private information arbitrage space is realized through investor investigation, that is, investor investigation provides a convenient way for the acquisition of private information. We also find that institutional investors have a greater mediating effect than non-institutional investors; local investigation has a greater mediating effect than non-local investigation. This paper has important implications for the literature and policies.