Managerial Equity Incentives, Controlling Shareholder Characteristics and the Choice of Credit Contracts

Abstract

In the relatively concentrated ownership structure, the design and implementation of managerial equity incentive plan are easily affected by controlling shareholders. The difference in the governance effect of controlling shareholders will have different effects on corporate financing demand and capability under the managerial equity incentives. The current research on equity incentives and corporate credit contract selection revolves around management agent issues, but pays little attention to the difference in the governance effect of controlling shareholders. Based on the signal transmission effect, the controlling shareholders influence the credit decisions of the banks as the credit suppliers, thus affecting corporate credit financing ability under the equity incentives. Therefore, this paper incorporates the controlling shareholders, executives and banks into the same analytical framework, to study the implementation of equity incentives on the choice of credit contracts based on the regulatory role of the controlling shareholders. Using the sample composed of listed corporations implementing the managerial equity incentives from 2009 to 2015, we empirically examine the effect of the game among controlling shareholders, executives, and banks under different managerial equity incentives on the choice of credit contracts based on behavior guide and signaling effects of managerial equity incentives under the moderation role of three types of controlling shareholders, namely state-owned controlling shareholders, non-state-owned controlling shareholders with the separation of cash flow right and control right, and non-state-owned controlling shareholders with the matching of cash flow right and control right. Using PSM method & DID model and after controlling endogenous influences of scale, maturity and costs as three major elements of credit contracts and other factors influencing the choice of credit contract factors, we get the empirical conclusions. Firstly, equity incentives in the state-owned companies have become the tool for executives to seek welfare and aggravate the managerial agency problem. However, the existence of bank soft budget constraints formed from government intervention can lead to more credit funds preference（especially long-term credit funds）. Secondly, the moderation role of ultimate controlling shareholders in equity incentives in non-state-owned enterprises is closely related with the separation of cash flow right and control right. When cash flow right and control right are matched, managerial equity incentives could promote the expectancy of internal management level and thereby non-state-owned enterprises obtain relaxed credit contracts. However, the equity incentives with high separation of cash flow right and control right for ultimate controlling shareholders induce the banks to reduce the expectancy of internal governance level of debtor companies and lead to more rigorous credit contracts. This paper expands the research of governance effect of managerial equity incentives, and has important reference value for improving corporate governance mechanism and effective implementation of managerial equity incentive plan. It concludes that a state-owned enterprise can deepen the reform of government decentralization and equity incentive system to provide decision-making and optimization of enlightenment for current financial institutions in the credit supply-side reform provided the screening and control of credit risk, equity incentive companies; on the other hand, it has the reference value for how the micro enterprises transfer the signal of the increase in internal corporate governance to financial institutions by equity incentives and then realize the access to relaxed credit contracts.