A Study Of Senior Managers’ Self-Interested Behavior Under Equity Incentive Mechanism

Equity incentive was initially designed to align the interests of managers and owners so as to mitigate the agency problem which is caused by the separation of control rights and ownership in modern corporations. However, equity incentive is a double-edged sword. It relates senior managers’ rewards to corporation interests; meanwhile it also breeds self-interested behavior of executives. Nowadays, a large number of companies are confronted with a common problem: incentivized executives do not earn their rewards through hard work; instead, with the legal appearance of equity incentives, top managers resort to various forms of manipulations to gain without performance. This sets professionals, regulators and scholars to deep consideration. Therefore, since equity incentive was formally practiced in2006, many sorts of laws and regulations have been adopted to standardize the development of equity incentive in our country. However, a large amount of empirical evidence shows that self-interested behavior of senior managers still exists. Stock option is a main form of equity incentive, hence the key issue studied both in theory and in practice. Previous domestic research which investigates the existence of senior managers’ self-interested behavior is mostly conducted from the perspective of strike price determination and exercise conditions. This paper used220stock option drafts which were announced between2006and2012as its sample and examined the methods in which senior managers seek interests. On the issue of selective information disclosure, this paper used cumulative abnormal return as a proxy variable in order to investigate whether senior managers take their information advantage to strategically reveal information. Based on the knowledge of overall return performance, this paper further analyzed abnormal returns of individual companies and their formal event announcements. No strong evidence was found that could prove executives selectively reveal company information. This conclusion is inconsistent with existing findings. On the relationship between stock option and dividends, paired sample test and logit regression were employed in this paper. The results show that the amount of stock and cash dividends of public companies which adopt stock option incentives is significantly higher than that of companies without equity incentives. Moreover, the application of stock option is accompanied with high level of stock and cash dividends in the year of stock option draft announcement. Based on the examinations about whether senior managers seek self-interests, a preliminary analysis was conducted to quantify executives’ extra profits gained from such behavior. It suggests that among the32companies in which managers have exercised then-options, executives have made an accumulative extra profit of￥88.75million(CAR) and￥42.8million (BHAR), respectively. Finally, a comparison analysis on the two kinds of self-interested behavior was conducted based on domestic institutional background and legal environment, and some practical recommendations were given hereby.By theoretical analysis and empirical examination, this paper proves that executives use high level of stock and cash dividends to reduce strike price and maximize their incentive rewards. Compared to previous domestic research, this paper extends the analysis on overall performance to individual companies’abnormal return for the examination of selective information disclosure. And an analysis of the relationship between stock option and cash dividend is also added to the investigation of the relation between stock option and dividends. Moreover, based on the existence examination of executives’ self-interested behavior, this paper further calculates the abnormal rewards which senior managers have gained from such behavior.