Study On The Equity-based Plan And Managerial Optimal Contracts

Firm is the most important and energetic factor as well as the micro foundation in the system of market economy, which, to a great extent, dominates a country's or a region's economy. The striking features of modern firm lie in the separation of its ownership and management, which naturally results in the principal-agent relation between shareholders and managers. How the owners of firm stimulate and control the managers, how to reduce agency costs so as to guarantee their interest is a very big problem.In recent years, the Equity-based Incentive Plan facilitated in the western countries is an effective method of reducing agency costs. The plan falls into two forms: the Restricted Stock Incentive Plan and the Stock Options Incentive Plan. The latter is usually introduced into foreign firm. Yet, since 2003, some famous international corporations have began to attach much importance to the stock incentive plan though the number of restricted stocks is seldom used nowadays .Companies in our country usually apply the stock incentive plan. The differences between the two methods and which one is better need to be further explored in this paper.The paper is to compare the two incentive models in hope to find out the better incentive plan by the major means of the incentive theory and taking into consideration of stock incentive cost, value and incentive effects.This paper begins with incentive cost. After getting rid of the point of view that restricted stocks are seen as a special form of stock option incentive method (the exercise price is zero), We expand the stock incentive plan into two forms: free offer and partial purchase , and then establishes a united stock incentive cost formula to make comparisons of stock and stock option stimulation served as two parallel categories. Analysis reveals that if cash is fixed in the contracts and if the purchase prices in stock contracts and the exercise prices in stock option contracts is equal, the incentive effects are similar. When the purchase prices change,the preference of the two methods are subject to variation.The author here also analyses the relation among the market value cost in...