The Impact of Equity Incentives on Firm Performance

Abstract

Based on principal-agent theory, this paper explores whether equity incentives can improve firm performance, and then investigates the relationship between equity incentives, earnings management and firm performance, using a sample of A-share listed companies in Shanghai and Shenzhen listed between year 2011 and 2020. The empirical results show that the implementation of equity incentives in listed companies can significantly improve firm performance; and equity incentives can significantly promote earnings management, which plays a role partly in mediating the effect between equity incentives and firm performance. The investigation further finds that equity incentives are more effective in improving firm performance in firms with low management performance and financing constraints when other factors are equal. This finding helps companies to use earnings management appropriately to strengthen internal control, and set up different incentive plans according to management performance and financing constraints to improve company performance.