A Research On The Dynamic Effect Of Equity Incentive From A Long-term Perspective

As an important component of corporate governance mechanism,equity incentive can alleviate the agency problem between shareholders and managers stemming from the separation of ownership and management,which has been regarded as the gold handcuff to retain talents and the engine to boost the performance growth of enterprises.With the completion of non-tradable share reform and promulgation of a series of related rules,equity incentive plans have been rapidly implemented as an important measure to optimize the structure of corporate governance among Chinese listed companies.Especially under the present background of mixed ownership reform,the implementation of equity incentive has ushered in new opportunity and its governance status has been further highlighted.Therefore,systematically evaluating the effect of equity incentive is of great significance.However,although it is generally accepted in academia that equity incentive is the most effective and sustainable incentive mechanism,no empirical research has been conducted to examine the dynamic effect of equity incentive on corporate performance under a long timeframe.In contrary,because of the difficulty in obtaining data of sufficient frequency and duration and the limitation on metrology identification method for analysis,most prior empirical studies have been exclusively limited to estimating the short-run or average effect of equity incentive on corporate performance from a static or short-term analysis perspective.In Chinese business practice,equity incentive system has been formally established for more than ten years and a number of incentive plans have gradually entered exercise period.Because of above-mentioned background,this article investigates the dynamic effect of executive equity incentive based on long-term performance evaluation framework,and examines how this dynamic relationship can be influent by the terms design of equity incentive contracts,corporate governance mechanism and institutional environment factors.The purpose of our research is to enrich the empirical evidence on equity incentive effect from the dimension of long-term performance evaluation and expand research on the influence factors of equity incentive effect from the micro level of contract terms,the intermediate level of corporate governance and the macro level of institutional environment.The main findings are as follows:First,equity incentive not only has incentive effect as a whole,but also shows dynamic effect on corporate performance from a long-term research perspective.Using propensity score matching method and multiple regression analysis,we find thatequity incentive has persistent performance-promotingeffect in the following three years after a one-year lagged effect,and the effect presents an obvious inverted u-shaped characteristic under the 5 years' evaluation timeframe.Further evidence shows that the implementation of equity incentive plan doesn't induce excess accrual manipulation or real earnings manipulation.The dynamic effect of equity incentive on corporate performance still significantly exists after eliminating the earnings management noise from corporate performance,which indicates that the dynamic performance-improving effect of equity incentive is real corporate performance improvement,rather than the result of earnings manipulation.Second,the choice of contractual terms and their proper combinations are the key to determine the effect of equity incentive.Compared with restricted stock which has better effect in the short run,stock option exerts more significant and persistent effect in the long run;Compared to contracts with less equity and objectives,the contracts have more significant and persistent performance-improving effect when more equity is granted to more employees.Equity compensation with stricter vesting conditions and longer expiration periods has stronger and more lasting performance-improving effect,while contracts with less constrains exist only short-term incentive effect,and even show negative effect from the fourth year;Further research finds that contracts with both higher incentive and constraint terms can achieve the most dynamic effect,which indicates that the equity incentive effectis not the simple result of a separated term of incentive contracts,but the comprehensive consequence of every individual terms'synergistic effect.Third,moderate control of large shareholders and effective board governance are the premise for equity incentive to display its dynamic effect.Compared to firms with too high ownership dispersion and concentration,equity compensation has stronger and more persistent performance-improving effect when principals are present and the controlling degree of large shareholder is moderate.Board governance enhances the positive link between equity incentive and corporate performance.The higher percentage in independent directors and the separate positions of the chairman and CEO on the board can lead to stronger and longer incentive effect.Board governance can make up the insufficient supervision caused by the absence of large controlling shareholders,but the complementary effect decreases with the increase of large shareholder's controlling degree.In samples with higher proportion of large shareholder shares,board governance has no significant on the effect of equity incentive,which indicates that excessive control of large shareholders weakens board's governance role in enhancing equity compensation's incentive effect.Fourth,reforming the property rights system and improving the competition of product market are the basic guarantee of equity incentive's effectiveness.State-owned controlling impairs the dynamic effect of equity incentive.Compared with non-state controlled enterprises,equity incentive exerts weaker and shorter performance-improving effect and has a two-year lagged effect.Product market competition has a positive effect on the association between equity incentive and corporateperformance.In the industry with high market competition,equity incentive haspersistent incentive effect.However,the performance-improving effect of equity incentive is weaker and can last for only two years in the industry with low product market competition.Further study investigates how product market competition can affect the incentive effect of state-owned enterprises.Evidence indicates that productmarket competition can enhance the incentive effect of state-owned enterprises.In the samples of state-owned enterprises with higher degrees of competition,equity incentive shows three-year incentive effect.Compared with present studies,this research contributes to the literature in the following three aspects:Firstly,this paper assesses the dynamic effect of equity incentive on corporate performance from a long-term research perspective,whichfills the gap of current academic research.Hence,our paper not only can capture the whole effect of equity incentive in a more comprehensive and scientific way,but also provide a new perspective for explaining the inconsistent research conclusions.Secondly,integrating agency theory with the basic views of contract theory,governance bundles theory and institution theory,this paper investigates the potential factors in moderating the dynamic effect of equity incentive from the micro level of contract terms,the intermediate level of corporate governance and the macro level of institutional environment.Hence,our research provides multiple theoretical research perspectives for clarifying the mixedassociations between equity incentive and corporate performance and enriches the research on the influencing mechanism in the process of equity incentive effect's realization,which has important practical implications in enhancing the incentive effect of equity compensation plans under Chinese special context.Thirdly,this paper uses propensity score matching as a main identification strategy,which can,to the largest extent,overcome the endogeneity problem caused by sample selection bias and reach a more robust conclusion.