Research On Institutional Environment, Equity Incentive Contract Structure And Its Effect

The stock ownership incentive has always been considered as a better solutionfor the “Smith’s problem”. However, the stock ownership incentive of China’s listedcompanies has been weird since the implementation. The extremely low exerciseprice, easy vesting conditions and relatively short incentive period have transformedinto the arrangement of welfare system. The paper has broken through thedisadvantages of direct investigation on the relationship between the seniorexecutive share-holding and the corporate performance only by the exogenousperspective. According to the realistic background of the listed companies in ourcountry with the common existing problems such as the government intervention,the insider control and the obvious management power problems caused by, thepaper has proposed to investigate the relations among the three parts as theInstitutional environment, the equity incentive contract structure and the effect bythe endogenous perspective.The paper has abstracted the theoretical basis from the principal-agent theory,the contract theory and the two rights’ alliance theory at first, and thensystematically organized the documents at home and abroad. Based on this,considering the listed companies in the equity incentive plan of announcements in2006-2011in the domestic securities market after the equity division reform as theexample, the paper has inspected the relations among the system environment, theequity incentive contract structure and the effect by utilizing methods such as themultiple linear regression, factor analysis, paired samples T inspection andmediating variable inspection.In the index design, the paper has measured the degreeof government intervention according to the three variables as the relation betweenthe government and market, the local marketization level and the final controller ofenterprise; measured the equity structure according to the major shareholders’holdings and Z index; measured the management power according to four variablesas the corporate leadership structure, the board size, the management shareholding,and the board shareholding; reflected the equity incentive contract structure fromfour factors as the incentive level, pattern, period and exercise price; and reflectedthe equity incentive effect from two layers as the corporate performance and theearnings management.The research finds that:(1) The Institutional environment influences the equity incentive contract structure.①The government intervention has lowered the equityincentive level;②The bigger management power is, the lower exercise price willbe selected;③The higher shareholding ratio held by major shareholders, the lowerequity incentive level will be, and the selected exercise price will be higher;(2) Theequity incentive contract structure influences the incentive effect.①Highermanagement equity incentive level, higher monetary incentive and shorter incentiveperiod cause better corporate performance, the optimal incentive period is3-4years;the corporate performance will be better when adopting the executive stock option;②The more shares gained by the management cause more monetary salary, longerincentive period and more serious earnings management behavior.(3) There arecorrelations among the Institutional environment, the equity incentive contractstructure and the effect.①The equity incentive level functions as an intermediaryconductor between the government intervention and the corporate performance.Comparing with the non-state-owned holding company, the government interventionhas not only lowered the equity incentive level of the state-owned holding listedcompany, and also lowered the corporate performance;②Under differentownership systems, the time and manner for the management to conductopportunistic behaviors are different. The management in the non-state-ownedholding company has bigger power in the initial design of equity incentive contract,and they usually gain a lower exercise price at a proper time by using their ownpower to influence the compensation committee. However, the governmentintervention has restricted the influence of management in state-owned holdingcompany during the initial establishment of compensation contract. So it is hard forthem to gain a lower exercise price. But in order to reach the vesting conditions, themanagement usually conduct the earnings management during the implementationof equity incentive;③The existence of major shareholders has restricted theopportunistic behavior of management to a certain degree.The study indicates that the implementation of equity incentive has enhancedthe corporate performance, but it has also caused the new opportunistic behavior ofmanagement at the same time. Generally speaking, China has not possessedsufficient conditions for the big-scaled implementation of equity incentive. It is onlyappropriate for limited pilot programs. The core work at the present is still toimprove the corporate governance mechanism and the construction strength of lawsand regulations system. The paper includes23diagrams,71tables and227references.