An Empirical Analysis About Equity Incentive’s Impact On The Inefficient Investment Of The Listed Companies

As one of the most important financial decisions for companies, investment decisions always attract lots of attention. According to theoretical analysis, executives should choose the investment projects whose net present values are greater than or equal to zero in order to maximize the companies’values. However, companies’investment behaviors are unsatisfactory in the real world, and inefficient investment is frequently reported. The two specific performances of inefficient investment are:overinvestment by choosing those investment projects whose net present values are negative; and underinvestment by giving up those investment projects whose net present values are positive. Both overinvestment and underinvestment will hinder to maximize the companies’values, and even will bring heavy burden to the companies. Therefore, seeking effective measures to curb inefficient investment is necessary.The principal-agent problem between shareholders and executives is the main cause for inefficient investment. In the nineteen fifties, in order to solve principal-agent problem, equity incentive emerged. In Western businessmen’s eyes, equity incentive is likened to the "golden handcuffs", and it can combine closely the interests of both executives and shareholders by granting executives a proportionate number of shares. However, as the exposure of financial scandals surrounding a lot of the well-known American companies like Enron, WorldCom and Arthur Andersen, equity incentive encountered unprecedented challenges, and "golden handcuffs" became "the root of all evil". After that, Microsoft and Citibank gave up equity incentive plans, and Dell reduced the number of stock options granted. People began to re-examine the equity incentive.In the early nineteen nineties, equity incentive has been gradually introduced into our country. By the end of2005, the issue of "Listed Corporation Equity Incentive Management Approach (Trial)" by the China Securites Regulatory Commission provided the formal regulations for the implementation of equity incentives in China. In recent years, with an increasing of listed companies choose to implement equity incentive, the literature about equity incentive becoming more and more abundant. Most of the domestic literature focuses on studying the relationship between equity incentive and companies’performances, equity incentive and companies’values, and studying the impact of equity incentive on inefficient investment is scare. However, whether the implement of equity incentives in China can successfully solve the principal-agent problem should be pay attention, and has both theoretical and practical significances. On the theoretical aspect, this paper study the investment efficiency under the investment decision-making context, and it is helpful to broaden the perspective of theoretical research. On the practical aspect, this paper is helpful to view equity incentive correctly and objectively, and makes a contribution to guiding Chinese listed companies which carry out equity incentive. Based on these, this paper makes an empirical study the impact of equity incentives on inefficient investment.This paper contains the following five parts:The first part is the introduction. First of all, this part points out the paper’s background and significance of the subject. Secondly, this part summarizes the domestic and overseas papers on equity incentives and inefficient investment. Then, on the basis, this part presents the content frame and innovation points.The second part is the related theories and hypotheses. In this part, author firstly defines the related concepts. Then, this part analyzes the related theories that equity incentive affects inefficient investment of listed companies. Finally, according to the theories, presents empirical research hypothesis to be detected.The third part is the research design for empirical analysis. First of all, explains the sample selection method and data sources. Secondly, selects the proxy variables. Lastly, presents the models for empirical research.The fourth part is empirical testing and analysis. Firstly, author gives the descriptive statistics of variables involved in the models, then, tests and analyzes whether equity incentive can affect inefficient investment; whether equity incentive affects the overinvestment of listed companies, and whether equity incentive affects the underinvestment of Chinese listed companies.The fifth part is the conclusions and recommendations of this paper. First, author presents the conclusions of this research; second, author makes some recommendations against the problems found by empirical test.The innovation points of my paper mainly includes following three aspects: First is the novel research perspective. Through reviewing the previous studies, author found that most papers focused on the relationship between equity incentive and companies performance, but studied equity incentives under the background of investment decision are relatively little and need to be improved. Second is the roundly research content, the previous literature payed more attention on overinvestment, but rarely emphasized underinvestment. Therefore, this paper makes an empirical study the impact of equity incentive on inefficient investment, and makes further study about underinvestment. Third is the timely data. An empirical study on the existing literature on the equity incentive is still using the data before2009. However, with the development of equity incentive in China; it is needed to study the implementation effect of equity incentive timely. This paper uses the financial data from the year of2009to2011.