The Short-term And Long-term Effect Of Stock-incentives——an Empirical Study Of Listed Companies In China

After the foundation of Dutch East India Company, the first stock-holding company in the world, in1962, stock-holding companies have became the dominant power in economy in the world and listed companies make this power even stronger. Along with the development of share-holding companies, the separation of ownership and management becomes common. This separation does Pareto-optimize the allocation of the resources because the owner may not have the management talent to manage his property and the one with management talent may not have the property to show his management skill. However, this separation brings some side-effect too. One if the most common and important one is the principal-agent problem or agency dilemma, which means the agent may not do his best to maximize his principal’s profits. This problem brings challenges to modern company management.Although the initial purpose of stock incentive plan is to offer a tax-avoiding compensation rather than to tackle the problem brought by the separation of ownership and management, people found that stock incentive plan could not only be a tax-avoiding incentive measure but also solve the agency dilemma to a great extent. So, the stock incentive plan became popular around the world quickly after its first appearance and it has improved along with its development. Now it is one of the most important and effective measures in corporate governance. Chinese listed companies tried to adopt stock incentive plans in the1990s but they were not popular or effective because of the conditions of the capital market at that time. After the Stock Right Separation Reforms completed and some critical laws were passed around2005, listed companies used stock incentive plans more and more often. There were as many as152cases in a single year of2011.Theoretical studies boom along with the development of the stock-incentives in foreign countries. The studies cover a wide range from theoretical to empirical. In theoretical studies, there are many theories other than the principal-agent problem study and generally problems related to the stock incentive plan are well explained. Yet empirical research results are not so unanimous. Actually they might vary greatly addressing the same problem from the short-term effect study to the long-term effect study.Just like the practices of stock incentives in China, related researches started rather later than those in the foreign countries. Although few new theories can be raised, scholars got some interesting and meaningful conclusions using empirical study in China market. However, they are far from consensus just like the empirical studies abroad. So there are still many problems related to stock incentives in China which need more studies. Thanks to the great number of cases happened in recent years, the study we did in this paper is meaningful and robust to a great extent.The effects we called mainly covers two aspect, namely the stock price effect and the performance effect. Yet in short term study, there is no performance effect during just dozens of days’ time. We focus on the stock price effect. In long term, we can study both of the two effects.We collected all the listed-company samples which announced to take incentive plan from2006. First, we use all of the samples, applying event-study, to research if there is a short-term effect, an impact to the stock prices brought by the announcement, and a significant positive or negative abnormal return during the study window. In this phase, we also study if the information is leaked before the announcement and the impacts are different to different group of companies. We try to explain all the phenomenons we mentioned above. Then we study the long-term effect of the stock incentives using the samples which actually applied the stock incentive plans. We try to find out whether the stock incentives can improve a company’s performances and the long term stock price or not. If the market is efficient, weak form is enough, the stock price of the companies should have abnormal positive return in long-term if the stock incentive is effective in raising the performance of a company. In this phase, we use two methods. The first is a method we named ROE-standardization for the performance effect study and the second we called stock incentive index for the stock price effect study.In the short-term effect study, we found a statistically significant positive abnormal return over the announcement of a stock incentive plan. We also found that the abnormal returns of different groups of companies are different. Generally the companies using restricted stock incentives have higher abnormal return than those using stock option incentives; companies which didn’t finally apply the incentive plan have high abnormal return than those who applied; there is no significant difference between the abnormal return of companies from the main board and the second board. We discuss the phenomenons and the reasons which may explain them.In the long term performance effect study, we find that after applied the stock incentive plan the performance of the company will have a U shape progress, which means the performances will decline in the early years after applying the stock incentive plan and will rise in later years. In the long run, the stock incentive plan may improve the performance of the company, although our study cannot prove it firmly because the sample set and data are not large and long enough.In the long term stock price effect study, we find no matter whether the stock incentive plan can improve the performance of the company or not, we are sure that it can raise the stock price of the company. The stock incentive index we made has great higher return than the HS300index. Provided the market is effective, we can say that the stock incentive plan is effective in improving the performance by a backward deduction. But the common existence of an adverse selection phenomenon, that is, only those good companies tend to take stock incentive plans, may weaken the conclusion above.In summary, we are sure that the stock incentive plan can raise the stock price and hence the value of the share-holders. We are apt to believe that it can also improve the performance of the company. Yet we still need more study.We provide the investors a simple but useful advice in investing in the stock market. That is to buy the stock of the companies that has adopted the stock incentive plan. Even if we are not100percent sure that it can improve the performance of the company, the stock incentives can serves as an information tagger that can help us to filter the good companies out and invest on them and get great access returns.