Abstract
This paper expands the previous research on management equity incentives (MEIs) and stock price crash risk by distinguishing between the "gold watch" region and the "golden handcuff" regions in MEIs. By using an estimation of the gold watch region and the golden handcuff regions based on 6,675 annual observations of China’s A-share listed companies, the stock price crash risk is found to be negatively correlated with MEIs in the golden handcuff regions (0–10%, 30%-100%) and is positively correlated with MEIs in the gold watch region (10%-30%). A further investigation of the mediating effects of peer effects on MEIs and the stock price crash risk reveals that peer effects have a partial mediation effect at the level of peer managers’ shareholding and mediate the relationship between MEIs and the stock price crash risk.
Highlights
China’s transformation from its original planned economy system to the market economy system has been a gradual transition
Based on the new three-step mediating effects model designed by Shan et al [44], this paper further explores the impact of peer effects on the relationship between management equity incentives (MEIs) and stock price crash risk, that is, Hypothesis 3
The 10%-30% range for MEIs is defined as a gold watch region
Summary
China’s transformation from its original planned economy system to the market economy system has been a gradual transition. To enhance the competitiveness of their companies in the capital market, managers motivated to refer to the corporate decisions of other companies in the same industry, and peer effects can create norms for the behaviour of corporate managers and reduce stock price crash risk These studies break the assumption found in previous studies that corporate decisions are independent of each other. This study provides the first empirical evidence for industrial peer effects on stock price crash risk through a three-step intermediary effect model, identifies the relationship between management equity incentives and stock price crash risk in the special business environment in China, and details the findings on the intermediary role of peer management equity incentives This is crucial because each industry has its own unique characteristics, “a specific constraint relationship” [21], that is, management’s discretion in making key strategic decisions.
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