Research On The Relation Between Equity Incentives And Earnings Management Of Listed Companies

Our country has issued a series of measures for reform and measurement on equity incentive since2006. It solved the problem of long-term incentives for managers which have existed for several years to a certain degree. It is also regarded as a very important measure for completing companies’ incentive system and elevating the value of the corporation. As one of the important factors that affect stock prices, accounting information has been given prior concern by stakeholders, such as investors, managers and creditors. Different from the western mature markets, our securities market is a newly emerged market which is now going through an economy transformation. So not only accounting rules and regulations of the system are not perfect but also the order under supervision is seriously interrupted. All of these provide the space for earnings through management. If the listed companies’ executives implement the behavior of earnings management in order to achieve the condition of equity incentives, this action would not only cause the distortion of accounting information, but also would seriously interfere with the normal order of the securities market. So, it has a very important meaning to research on the relation between equity incentives and earnings management of listed companies.This paper introduces several economics theory such as contract theory, signal transfer theory, positive accounting theory, human resources theory etc. And then the theories and literatures of the equity incentives and the earnings management are systematically summarized. The paper conducts the theoretical analysis of the relation between equity incentives and earnings management from following aspects:the analysis of the current situations of listed companies’equity incentives, the mode of equity incentives and the methods of earnings management after equity incentives brought into operation. Based on the theoretical analysis, this paper selects99listed companies from Shanghai or Shenzhen stock markets as a sample, which implemented equity incentives in2010.Using the fixed Jones model to calculate the discretionary accrual as substitution variable of earnings management, compared with the year when the equity incentives implemented and the year before by the paired sample T-test to reflect the change of earnings management of the two years. And then establishing a multiple linear regression model to empirical research on existence of earnings management of the listed companies that implemented equity incentives, the influence on earnings management from managerial stockholding, equity concentration, the size of the board and different incentive models etc. finally, basing on the analysis of the study conclusion, the paper puts forward several relevant policy Suggestions. This paper includes the following five parts:The first part is the introduction, it introduces the background and significance of this study, and then combines the domestic and foreign relevant research results to describe the current situations and introduces the ideas and methods of this paper, at last explains the possible innovations and the insufficiency.The second part is the theoretical basis, first introduces the concepts of equity incentives and earnings management, then reviews and comments the economic theory about equity incentives and earnings management.The third part is the present situation analysis, through the total amount of the companies, the source of the incentive stocks and the other aspect to describe the implementation of equity incentives in recent years of listed companies. It also introduces the different means of earnings management.The fourth part is empirical research, uses the statistical software SPSS to analyze the sample. Compares the data after equity incentive plan announced and before, the changes of earnings management are analyzed and compared. Then some empirical tests of the equity incentives amplitude and other internal governance structures on the influence of earnings management are illustrated. At last summarizes and analyses the empirical results.The fifth part summarizes the results of empirical research and makes some policy recommendation in order to reduce the earnings management behavior of listed companies that implement the equity incentives, it also puts forward some suggestions for further research.The empirical results show that:(1)The listed companies have downward earnings management by lowering discretionary accruals during the one year prior to the announcement of equity incentives plans. So the policy makers can reach on the condition easier because of the reference standard reduced when it is built.(2)In the implementation of equity incentives of listed companies, there is a significantly positive correlation between the degree of earnings management and the degree of equity incentives.(3)There is significantly positive correlation between the share ratio of the managers and the degree of earnings management. The higher share ratio of the managers, the stronger control ability they have, can they easily make the decision for their benefit.(4)There is a significantly positive correlation between the ownership concentration of the listed company and the degree of earnings management. The more stock share that hold by the top5shareholders, the stronger motivation to implement earnings management they have.