The Determinants Of Executive Equity-based Incentive In China's Listed Firms

Even within the academic area of corporate governance,where massive conclusions conflict with each other,the topic about incentives on managers seems like the most puzzling one.From agency theory's perspective,incentives based on firm's equity are considered as more effective than other mechanisms in leading managers to behavior in the interest of the shareholders.However,the existing empirical studies can not explain why or why not firms intend to use executive equity-based incentives.Institutional background in the US could be part of the causes impede progress of examining determinants of EEI.Besides a handful of literatures on EEI beyond the US, we focus on a reform of China's stock market during recent years.Further than the biggest emerging and transitional economy around the world in past three decades, China's capital market provides us an ideal laboratory to investigate the determinants of EEI since its unique institutional background.In particular,when solving the agency cost between shareholders and managers,China's partially privatized state owned entities face a much more similar situation to those in Anglo-Saxon economies comparing with those in Germany or Japan.Moreover,our paper shed light on the actions of listed firms when they deviated from their respective optimal incentive contracts with managers.To the best of our knowledge,this is the first empirical study to test the substitute relationship between executive compensation incentives with other measures for reducing agency costs.Here we take advantage of the institutional features in China's stock market again.Whether a listed firm announced EEI plans soon after restrictions were eliminated,is chosen as the proxy variable for whether it deviated from its optimal incentive level during pre-reform period.We first conduct a logistic model with a sample of 104 EEI cases between 2006 and 2008 to investigate the determinants of listed firms announce EEI.According to our results,for SOEs in stock markets,there is a strong negative relation between listed firm's ownership concentration and the probability that it announce EEI,after controlling for various characteristics of firms and CEOs.We also find the tradeoff between risk and incentive when the ultimate owner of listed firm is government,which has not been supported in most of prior empirical analysis.Second,our results show that,in addition to enhance executive's compensation incentive under restricted regulation environment,the companies which deviated from their optimal incentive level,tended to pay more cash dividends than other listed firms. Thus dividend policy,usually regarded as a mechanism to reduce agency cost in the context of developed markets,appears to act as the same function in,at least part of, emerging markets.Last but not least,in contrast to their counterparts owned by government,the ultimate owners of listed family firms may consider EEI as a legal opportunity to strengthen their controlling power on firms rather than the original meaning of EEI.Our results indicate,without fundamental change about the Capital discriminatory towards non-SOEs in law and investment environment,private entrepreneurs will not have enough motivations to take EEI or other methods imported from developed markets.