Equity Incentives Research Articles

Work-Related Perks Stimulation and Corporate R&D Investment in Chinese Listed Companies of Emerging Market

Based on the high risk and uncertainty of innovative behaviors, this paper studies the role and effect of work-related perks in the contract that encourages executives to respond to innovation in Chinese listed companies. From the manager risk-taking perspective, empirical testing with all A-share listed companies in P. R. China from 2007 to 2012 in fast-growing market found that under the control of monetary compensation and equity incentives, work-related perks promote an incentive and synergistic effect on corporate innovation; but the above effects are mainly observed in emerging high-tech companies that are strongly relied on corporate innovations. Therefore, the above results are not affected by differences in corporate governance, and may eliminate the opportunism behaviors of executives while managing the enterprise's innovative activities. The presented model could possibly be found useful to formulate and motivate executives to invest in innovation and minimize the embezzlement in fast-growing companies in emerging market.

Business Environment and Asset-Light Strategy: Based on the Contextual Analysis of Equity Incentive and Nature of Property Rights

According to the resource dependence theory, the survival and development of enterprises are closely related to the external environment. As one of the important external environments faced by enterprises, business environment exerts widespread effects on corporate behaviors, and it also affects the asset-light strategy mode theoretically. As a new commercial operation mode, asset-light strategy is gradually favored by academic community and practice field, but the driving force behind it has not been examined empirically for a long time. The improvement of business environment can provide a good market, legal and financial environment for asset-light strategy, which reduces the cost of maintaining external relations. Meanwhile, it also decreases the risk and cost of RD meanwhile, it also provides certain inspiration value for commercial mode choice.

Corporate governance and firms’ efficiency in China’s manufacturing listed companies from dynamic perspectives

This research applies the dynamic slack-based measure (DSBM) model to evaluate the dynamic efficiency of manufacturing companies in the long run and uses the Censored Least Absolute Deviations (CLAD) model to analyze the effect of corporate governance on their overall efficiency and the efficiency of each input factor. We find the following main results. First, overall efficiency of the manufacturing industry listed companies is low. 2) Debt efficiency is lower than the efficiency of shareholders’ equity and exhibits a downward trend. 3) Labor efficiency is the lowest among all inputs. 4) The efficiency of the medicine and bio-products industry is the highest, while the efficiency of the paper and printing industry (which causes serious pollution) is the lowest. 5) Companies with low export intensity and high capital intensity are the most efficient, while companies with high export intensity and low capital intensity are the least efficient. 6) Ownership concentration and efficiency have a significantly positive U-shape relationship. 7) Board size and efficiency have a significantly inverted U-shape relationship. 8) An actual controller with a state-owned nature has a significantly negative impact on efficiency. 9) Executive compensation, equity incentive, and institutional ownership have a significantly positive impact on efficiency.

Non-GAAP Disclosures and CEO Pay Levels

We examine the association between CEO cash and equity compensation and non-GAAP disclosure practices in a responsive regulatory and opaque compensation reporting environment. Our empirical evidence, based on a sample of public companies in New Zealand, shows that CEO cash compensation is associated with the likelihood and frequency of non-GAAP disclosures, whereas equity incentives are not. Our results document evidence of an increase in the frequency of non-GAAP disclosures and a decrease in the provision and quality of reconciliation between non-GAAP measures and closely related GAAP measures around CEO cash compensation. In particular, managers use these disclosures when their GAAP earnings benchmarks are missed. A marginal decrease in opportunistic non-GAAP disclosures following the adoption of the International Financial Reporting Standards (IFRS) indicates little change in reporting behavior following adoption of IFRS. Our findings suggest that managers disclose non-GAAP measures with opportunistic intentions motivated by compensation and points to the need for regulators to set policy about clear reconciliation standards.

Managerial incentives to take asset risk

We argue that incentives to take equity risk (”equity incentives”) only partially capture incentives to take asset risk (“asset incentives”). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Stock holdings can induce substantial risk-taking incentives, contrary to the assumption that only stock options drive risk-taking. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

A Study on Equity Incentive Schemes of Wangsu Technology Enterprises

A Study on Equity Incentive Schemes of Wangsu Technology Enterprises

The impact of equity incentive plans (EIPs) on accounting conservatism in listed Chinese firms

PurposeThis study investigates whether listed firms using equity incentive plans (EIPs) adopt more conservative accounting in China's unique corporate setting.Design/methodology/approachBased on a sample of 2,243 listed firms and 9,950 firm-year observations for the period of 2008–2017, this study employs piecewise cross-sectional regression models with year and industry fixed effects to examine the associations proposed in the research hypotheses.FindingsThis study finds a positive relationship between the adoption of EIPs and accounting conservatism in listed Chinese firms. Further analyses reveal that this positive relationship is more pronounced when listed Chinese firms use restricted stock units (RSUs), instead of stock options, in their EIPs.Research limitations/implicationsUnlike many early studies, this paper empirically investigates the impacts of two different types of equity incentives – stock options and RSUs – and thus contributes to accounting and corporate governance literature by providing a better understanding of the impacts of different types of equity incentives on financial reporting quality. However, this study does not consider other alternative equity incentive measurements because of the limited data regarding Chinese firm's executive compensation.Practical implicationsThis study offers investors and policymakers in China some insight into how accounting conservatism in listed firms might be shaped by equity incentives used in their managerial compensation schemes.Originality/valueThis study is one of the few that examines the effects of using equity incentives in a large emerging market. It offers support for the view that the recent introduction of policies on EIPs by the Chinese government has an overall positive impact on listed firm's financial reporting quality, as reflected by greater degrees of accounting conservatism.

The role of innovation investment and executive incentive on financial sustainability in tech-capital-labor intensive energy company: Moderate effect

As an essential way to alleviate the principal–agent issue, the executive incentive not only guides the innovation activities but also affects the financial performance of enterprises. In conjunction, senior managers are the core personnel of enterprise operation and hold strategic decision-making power. Therefore, this paper aims to explore the bidirectional relationship between innovation investment and financial sustainability and the moderate effect of executive incentive in the energy industry. The results show that innovation investment has heterogeneity effects on business performance in different type energy companies on different periods. In other hands, salary incentive has a significant positive moderate impact on the relationship between innovation investment and financial sustainability, especially in technology-intensive companies. Equity incentive does not show significant moderate effect in the whole sample and sub-sample. This paper proposes a new research perspective on the relationship between innovation investment and financial sustainability, which has a practical significance to weigh innovation expenditure and corporate target performance and design an executive incentive mechanism.

The Impact of Equity Incentives on the Accuracy of Analyst’s Earning Forecasts

The Impact of Equity Incentives on the Accuracy of Analyst’s Earning Forecasts

An Analysis of the Mechanism of the Core Talent Equity Incentive Based on the Academy of Agricultural Sciences

<p>Talent equity incentive has been implemented in many large modern companies, and it has achieved very commendable results. As a national research unit, the Academy of Agricultural Sciences is very different from market-oriented companies in its operation, but it is much the same in motivating and retaining employees. Combined with the direction of talent construction in the contemporary Academy of Agricultural Sciences, this article starts from the theory of talent equity incentives and fully understands the role of talent equity incentive mechanisms in enterprise development. It finally proposes innovative core mechanism incentive methods to provide references for the introduction of talent equity incentive mechanisms by the Academy of Agricultural Sciences.</p>

Research on the Influence of Executive Incentive on Audit Fees of Listed Companies

Since the listed companies were required to disclose audit fees in 2001, executive incentive is considered to be an important measure to improve corporate performance and reduce audit fees. There are different conclusions on the correlation between the two. In this paper, the mechanism of the impact of executive incentive on audit fees in listed companies is reviewed. It is found that under the influence of audit cost and risk premium, executive compensation and equity incentive have an impact on audit fees through audit risk. This paper selects A-share listed companies in Shanghai and Shenzhen of guotai'an database from 2013 to 2017 as research samples, and makes an empirical analysis on the relationship between executive incentive and audit fees. The results show that: there is a significant positive correlation between executive compensation level and audit fees; there is a significant negative correlation between executive equity incentive level and audit fees. According to this, this paper puts forward some suggestions, such as improving the company's salary system, improving the level of equity incentive, adopting a variety of equity incentive combinations, giving full play to the supervision role of internal governance institutions, etc., to provide reference suggestions for improving the incentive mechanism of senior executives and reducing audit fees.

Deception by commission or by omission – management forecasts surrounding share repurchases

PurposeIn this study, the authors extend upon Brockman et al. (2008), who provide evidence that managers opportunistically accelerate bad news prior to share repurchases, but provide limited evidence that managers withhold good news until after repurchases. The authors examine management forecasts surrounding share repurchases in periods when companies must disclose detailed repurchase information. The authors argue these disclosures increase managers' legal and reputation risks of accelerating bad news, but have a lesser effect on delaying good news.Design/methodology/approachFirst, the authors examine whether managers alter the information released to the market before buying back shares by comparing managerial forecasts made within 30 days before the beginning of a repurchasing period with those made outside of this window. Second, the authors examine whether managers are more likely to provide good news forecasts, in terms of both magnitude and frequency, after buying back shares. Lastly, the authors examine the impact of CEO stock ownership on managerial forecasting behavior surrounding share buybacks.FindingsConsistent with the authors’ hypotheses and contrary to Brockman et al. (2008), the authors find limited evidence that the likelihood or magnitude of bad news forecasts is greater in the period before share buybacks. Instead, the authors document that the frequency and magnitude of good news forecasts increase in periods following share buybacks and that these associations are positively moderated by managerial equity incentives. The authors also find that the withholding of good news is associated with lower average repurchase prices and greater repurchase volume. The authors further show that, when litigation risk is greater, managers are less likely to accelerate bad news prior to repurchases and more likely to withhold good news until after. Overall, the study results are consistent with managers balancing the benefits of opportunistic repurchase behavior with the costs.Originality/valueThis study contributes to the management forecast and share repurchase literatures by providing evidence consistent with managers opportunistically releasing earnings forecasts in the period after buying back shares. Most importantly, the authors show that after the rule revision, managers refrain from actively disclosing bad news that carry higher legal costs. Instead, they opt for the omission of good news to repurchase stocks at lower prices. The study results reconcile the conflicting evidence of Brockman et al. (2008) and Ge and Lennox (2011).

Managerial equity incentives and R&D investments in emerging economies: study based on threshold effects

ABSTRACT Do managerial equity incentives benefit or impede R&D investments? To address this question and the inconsistent empirical findings on the topic, this study investigates the relationship between equity incentives and R&D investments as well as the threshold effects of some contextual factors. Our study evidence a curvilinear inverted U-shaped relationship between equity incentives and R&D investments by using GMM system estimators for a sample of 158 Chinese firms for the 2006–2018 period. Our findings also indicated that the influence of equity incentives on R&D investments is constrained by contextual factors such as financial slack and equity concentration, suggesting that financial slack plays a double threshold effect on the above relationship, while equity concentration performed a significant single threshold effect.

Are Dividends All for Rewarding Investors? Evidence from Payouts Induced by Return on Equity Targets

ABSTRACT Dividends have long been perceived as a way for firms to reward investors. However, managers are likely to inflate return on equity (ROE) by paying out dividends because doing so reduces owners’ equity. We utilise performance-vesting equity incentive plans that adopt ROE as the performance measure to examine this possibility. We find that firms with pre-dividend ROE slightly below the vesting target are more likely to pay dividends and are associated with larger payout ratios than others. Because weighted average ROE’s computation assigns more weight to earlier paid dividends, we also find that these firms are more likely to pay dividends earlier and have larger time-weighted payout ratios. Further investigations show that dividends substitute for accrual and real earnings management in inflating ROE. Finally, we obtain evidence that ROE-induced dividends reduce firm value in the long run. Overall, our evidence reveals that dividends may be induced by managers’ incentives to meet ROE targets. This phenomenon deserves more attention, as nowadays regulators often take an exclusively positive view of dividends.

Top management incentives and financial flexibility: The case of make‐whole call provisions

AbstractConsistent with the premise that make‐whole call provisions enhance value‐creating financial flexibility, we find that higher sensitivity of managerial wealth to stock price (delta) increases the likelihood that corporate bonds contain make‐whole provisions. Building on the results of related research, post‐issue financial performance of make‐whole callable bond issuers increases in delta. In line with prior findings that demonstrate financial flexibility can be costly to bondholders, we find that managerial equity incentives impact the incremental effect of make‐whole provisions on the pricing of corporate debt securities. Consistent with the flexibility explanation, we also find that the market response as measured by abnormal trading volume to the issuance of make‐whole callable debt varies in equity incentives. Overall, our results suggest that managerial incentives play a role in the choice, pricing, and market response to make‐whole options in corporate debt securities.

Employee Stock Ownership Plan，Collective Incentives and Enterprise Innovation

As an internal incentive mode for enterprise development, Employee Stock Ownership Plan（ESOP）has got great attention and been widely used in US. In China, whether ESOP is suitable for China’s national conditions and whether it is essentially consistent with China’s socialist nature require theoretical explanation and empirical test. Although some studies have found that ESOP does promote enterprise innovation, its role and mechanism are always confused with those of equity incentives. Moreover, its unique role to enterprise innovation in theory is also automatically ignored as a “black box” with little systematic theoretical analysis. This leaves a large space for studying how ESOP promotes enterprise innovation.Therefore, this paper attempts to study the collective and cumulative incentive effects of ESOP on enterprise innovation by redefining the core nature of ESOP. Based on the basic theoretical assumptions, this paper applies the propensity score matching model and the difference-in-differences model（PSM + DID）to identify the impact of collective ESOP on enterprise technological innovation by using the policy impact of ESOP restart in China in 2014. The sample data of listed companies in Shanghai and Shenzhen stock markets from 2013 to 2017 have been used, and the empirical results show that: ESOP has a significant incentive effect on innovation; this effect does not increase linearly, but shows a U-shaped cumulative effect; and it is not notable in the short term. In addition, ESOP is significantly attractive for innovative talents, and it has different incentive effects for different types of enterprises. The research provides important policy suggestions on how to promote the application of ESOP in the innovation of Chinese enterprises and how to implement the basic socialist distribution system.The anticipated contributions of the paper are:（1）It identifies the core nature of ESOP as the collective incentive that can form the collective innovation power of enterprises. This reveals the mechanism of the “black box” effect of ESOP on enterprise innovation, and deepens the correlation analysis between this theoretical logic and the socialist basic economic system with Chinese characteristics; （2）To analyze the cumulative effect of ESOP on enterprise innovation, its attraction effect on innovative talents and its different incentive effects for different types of enterprises from the perspective of collective incentives for ESOP will make the research both logical and practical, and more systematic; （3）Based on Chinese data, it combines the propensity score matching model with a series of robust estimation methods to avoid potential endogenous problems as much as possible in policy evaluation. These methods not only are explorations and deepening based on previous researches, but also will provide data support for understanding the superiority of the current system for ESOP and the special national conditions, and for policy advice purposes.

Can non‐executive equity incentives reduce internal control ineffectiveness? Evidence from China

AbstractUsing data from Chinese listed firms for the period 2012–2018, we provide new evidence that the intensity of non‐executive equity incentives can reduce the likelihood of internal control weaknesses and improve internal control effectiveness. We also find that internal control weaknesses are more likely to be remedied in firms that implement strong non‐executive equity incentive polices. Besides, we document novel results that employee equity incentives for non‐executives can optimise the internal environment, improve the internal supervision system, and thereby reduce the operational‐level weaknesses of a company’s internal controls.

Enhancing managerial equity incentives with moving average payoffs

AbstractPrior research suggests that Asian stock options provide stronger managerial equity incentives than traditional stock options do, holding the cost of the option grant constant. Although this is true on the grant date, it is not over the life of the option grant. Very little of the initial advantage remains after 2 years because Asian stock options have diminishing incentive effects over time. A simple solution is to replace averaging over the option's life with averaging over a moving window. We show that moving average options do not have the diminishing incentive problem and are effective in preventing managerial gaming.

Do equity incentives for the managements have impact on stock-pricing efficiency? Evidence from China

PurposeThe purpose of this paper is to investigate the impacts of equity incentive on stock pricing efficiency, as well as the institutional investors’ response to equity incentive and its role in stock pricing efficiency.Design/methodology/approachUsing a sample of 1,842 companies that announce implementing equity incentive schemes during the period 2009-2018, the authors compare the pricing efficiency between the firms with equity incentive and those without equity incentive, and companies that implement equity incentive before and after the implementation of equity incentive by using multiple regression and propensity score matching -DID (difference in difference) method. In addition, the multiple regression model is built to test the response of institutional investors to equity incentive and its role in the efficiency of stock pricing.FindingsThe empirical results indicate that a company’s stock price is influenced more by firm-specific information than systematic factors after it announces a stock-based compensation scheme. Institutional investors respond positively to companies that implement equity incentives. Among the companies that have implement equity incentive, the higher the shareholding ratio of institutional investors, the higher the efficiency of stock pricing.Originality/valueThe authors innovatively establish a connection between the implementation of equity incentive and the operation of stock market. The results imply that besides alleviating the agency problem, equity incentives can also improve the efficiency of stock pricing, which provide empirical evidence to support the positive effect of equity incentive.

Promoting Enterprise Innovation through Equity Incentive

Innovation is the foundation for the survival and development of an enterprise. But the managers of the enterprise are not willing to increase the risk to innovate. In order to encourage managers to innovate and ultimately improve the performance of enterprises, Equity incentive is a very effective method. To promote enterprise innovation through equity incentives, We should first improve the corporate governance structure. Secondly, Enterprises should design reasonable and effective equity incentive plans according to their own conditions, and finally, Government management departments should strengthen supervision and support.