The Empirical Research On Earnings Management Impacted By Equity Incentive

As the listed companies’ shares are increasingly dispersed, management techniques areincreasingly complex and advanced, human capital has attracts more and more attention amongenterprises around the world, and many companies have launched various forms of equity incentivepolicies, so as to motivate managers. In April2005,China started to carry out the Non-tradable ShareReform, which has made the listed companies change their original distorted ownership structure, andachieved full shares in circulation. January4,2006, the Commission issued" the Documents on ListedCompany Equity Incentive Management", which allows the listed companies that had implementedthe non-tradable share reform can carry out equity incentive policies. The reform and documents havegiven supports to implement equity incentive policy. Now, more and more companies have attemptedto carry out the equity incentive. The equity incentive policy works well on motivating managers, butit also induces managers to control earnings, this will change the original intention of the equityincentive policy, and equity incentive may become a tool for managers to erode shareholders’ wealth.At the same time, if managers don’t satisfied with the level of granted options, they might use theirown powers to expand their cash pay, and abandon earnings manipulation, which has a higher costand risk. Based on this, the paper firstly studies how equity incentive influences earnings management,then adds manager’s power as a regulating variable to explore the regulating function of the power ofmanagers between the equity incentive and earnings management.Firstly, the paper reviews relevant literature at home and abroad, then analyzes the situation onChina’s implementation of equity incentive and the earnings management. The paper selects216listedcompanies which implement equity incentive policy during the2012as the research sample, uses theextended Jones model to calculate the extent of earnings management. Studies have shown that themanagers in the listed companies which implement equity incentive exist motivations of earningsmanagement in order to pursue their own interests. Through empirical analysis, the level of equityincentive has a significant positive correlation with earnings management degree, the higher theincentive level is, the greater earnings management degree is. And the managers’ power play asignificant regulatory role in the equity incentive level and earnings management degree.The study on the relationship between equity incentive and earnings management, and theregulating function of the manager’s power, not only contributes to the development of incentivetheories, but also conduces listed companies draw up more optimizing equity incentive plans orpolicies, and the distribution of managers’ power, so as to help companies and shareholders encourageand supervise managers. Finally, the paper provides some countermeasures and suggestions on theremuneration system, corporate governance and other practical guiding significance from the point ofmaking an equity incentive plan, optimizing the distribution of managers’ power and also thesupervision department and other relevant departments. The research will have a practical guidemeaning to the compensation system and corporate governance structure of Chinese listed companies.