The Effect Of Management Equity Incentive On The Efficiency Of Corporate Investment

The efficiency of investment is very important for corporate performance. In the past some researches have discussed the relationship between it and equity incentive for executives. This paper will introduce the social capital, because the existence of it will affect the effect of equity incentive. Because efficient investment is the result of investment behavior, so this article will discuss two types of non-efficient investment behavior to start analysis, and investment behavior are divided into two categories, including underinvestment and overinvestment.This paper argues that the equity incentive for executives does not reduce underinvestment. Because underinvestment may be due to the pricing difficulties caused by asymmetric information, making investment riskier, executives have no motivation to actively invest. So equity incentive can not play an active role to improve.But social capital on the one hand can be used by large shareholder to supervise executives, on the other hand through reputation mechanisms,it can encourage executives actively act. The “lazy" executives will be known by the outside investors and their reputation will be negatively impacted. So,social capital can improve the effect of equity incentive for executives.This paper argues that equity incentive for executives can not reduce overinvestment, because holding shareholders often seek private benefits through it. When this happens, equity incentive for executives can not make a difference. And social capital can not improve the situation, because it may facilitate the holding shareholder to reap benefits at the cost of other stakeholders.This article does empirical analysis by 2010-2013 data to prove that regardless of the impact brought by social capital, the management equity incentive for executives will cause overinvestment.But it has no impact on the overinvestment. The existence of social capital can enhance equity incentive to inhibit underinvestment, mainly because social capital can weaken he positive correlation between equity incentive and underinvestment.However, social capital is still unable to improve the influence brought by equity incentive to over investment.