Research On Effects Of Equity Incentive On Earnings Management In China

As a long-term incentive measure, equity incentive gives the management a certain number of stocks. It can link the interest of the management with the long-term interest of the company, decrease the cost of agent effectively, and attract the excellent talents. CSRC(China Securities Regulatory Commission) promulgated the Measures for Administration of Equity Incentives Plans of Listed Companies(For Trial Implementation) in 2006. It marks the equity incentive into the specification phase. By 2009, equity incentive system entered the mature stage. However, the equity incentive has two sides’ effects: it motivates the management to work hard to improve the value of the company; otherwise, its lucrative return on equity induces the management to manipulate earnings. The management proceeds negative earnings management before the announcement of equity incentive plan, so that the vesting conditions become lower. After the implementation of equity incentive, the management proceeds negative earnings management. So that financial performance can easily reach the vesting conditions. At the same time, it can spread better development message of company and raise the stock price, so that the management can get more return on equity. Appropriate earnings management is conducive to the implementation of equity incentive. But it needs to avoid financial scandals. It thinks that Enron financial fraud case is due to the earnings management.Fist, this paper dose a summary and elaborate the theories of equity incentive and earnings management, and then analyzes the principal-agent theory, human capital theory, contract theory and the motivation of earnings management. Based on the basic theory, we propose research hypotheses and construct models. This paper selects 386 listed companies, which have published their equity incentive plans between 2009 and 2013. We use the announcement day as a time division point, analysis the effect before and after the announcement day. Through empirical analysis, we draw four conclusions as below. First, equity incentive can trigger earnings management. The management proceeds negative earnings management before the announcement day and just the opposite after announcement day. Second, there is a positive relation between the degree of equity incentive and earnings management. Third, there is a negative correlation between earnings management degree and incentive’s validity. Fourth, there is a positive linkage between accrual and real earnings management. This paper demonstrates the earnings management triggered by equity incentive. It helps the accounting firm, external investors and regulators focus on earnings management, especially the real earnings management which is more secluded. This paper helps improve corporate governance, give full play to the positive role of incentive stock options, regulate the behavior of earnings management, and promote the healthy development of the securities market.