Study On The Effect Of Equity Incentive System In Chinese Listing Corporation

According to the principal-agent theory, the separation of ownership andmanagement is the feature of the modern enterprise. Business owners have ownershipof enterprises and at the same time burden the risk of decision-making. But actually,managers are the people who run the enterprise, so the agent relationship is formedbetween the owners and managers. Because the owners and the managers havedifferent goals, so it will have a conflict of interests. To maximize their own interests,the managers may sacrifice the interests of shareholders. In order to solve theprincipal-agent problem, people create the equity incentive system. Equity incentivesystem is a kind of long-term incentive system for the company’s managers. It can berealized by the way of stock options, restricted stock, stock appreciation rights etc. Intheory, through giving a portion of the shares to the managers in a certain way, equityincentive system can combine the interests of managers and shareholders withlong-term development of the enterprise together, in this way, encourage managerswork hard, so as to reduce agency cost, improve enterprise performance. But inpractice, whether the equity incentive system can reach the expected effect, manyscholars have made a lot of empirical researches, but they did not obtain consistentresults. In order to smooth implementation of the system and achieve the desiredobjective, this paper, based on the results of previous studies, choose101listingcorporations in Shanghai Stock Exchange and Shenzhen Stock Exchange which havealready implemented equity incentive system from the year2006and the year2011asa sample and have a empirical research on the effects of listing Corporation’simplementation of equity incentive system.This paper consists of five parts. The first part describes theoretical knowledgerelated to equity incentive in detail, including the basic concepts, the elements ofequity incentive and theoretical basis. The main elements of the equity incentivesystem are as follows: incentive target, incentive amount, the exercise price, timearrangement, the exercise conditions, source of stock, fund source and so on. Theequity incentive has three theories: the principal-agent theory, human capital theoryand incentive theory. The second part analyzes the development and present situationof equity incentive system in China’s listing Corporation. The implementation of theequity incentive in China has experienced four periods: introduction period, tryingperiod, adjustment period, as well as the promotion period. In addition, the secondpart analyzes present situation of equity incentive system in China’s listingCorporation from three aspects, they are: the nature of equity, industry distribution,the equity incentive elements design. The third part does the empirical research by using descriptive statistics and regression analysis method to investigate therelationship between the proportion of equity incentive in China’s listing Corporation,the length of validity period of equity incentive and corporate performance,agencycosts.The main conclusions are as follows:(1)With the increase in the proportion ofequity incentive, agency costs reduce;（2）The proportion of equity incentive andcorporate performance have inverted U type curve relation;（3）The longer equityincentive period is, the smaller agency costs is；（4）The equity incentive period has nosignificant impact on corporate performance. According to the results of empiricalanalysis, the fourth part analyzes the reasons why the effect of equity incentive systemon Chinese listing Corporation is not obvious, mainly because the capital market isnot perfect, managers’ selection is not scientific, corporate governance has problems,equity incentive index is single and one-sided, the design of equity incentive plan isnot scientific. Based on the existing problems in implementation of equity incentivesystem in Chinese listing Corporation, this paper finally put forward relevantsuggestions, including the enhancement of the effectiveness of the capital market,improve the corporate governance structure, establish a scientific and reasonableperformance appraisal index, scientifically selecting managers, making reasonableequity incentive plan.