Study On Timing Behavior Of Stock Option Incentive

Since an important measure named "Equity Incentive Measures for the Administration of Listed Companies" were implemented in China in 2006, market parties have regarded equity incentive plan as an significant approach of improving company’s incentive system and raising corporate value. With the establishment and perfection of modern enterprise system, the separation of ownership and management results in corporate governance "principal-agent" problem becoming increasingly prominent, how to improve the operating performance and reduce agency costs has become a critical issue to be solved. The equity incentive plan, which is a long-term incentive system, can effectively solve the conflict of interest between shareholders and managers by granting managers partly shares. However, with the market gradually improving and in-depth equity incentive plan being implemented, the drawbacks of equity incentive plan appear, of which the main problem is the managers’ opportunistic behavior of market timing during the implementation of equity incentive. This is because, according to the theoretical analysis of rational economists assumptions and management authority, managers who are makers and major beneficiaries of the equity incentive plan, have more motivation and ability to maximize their own benefits and act opportunistic timing behavior, particularly under the circumstances that our current market is not mature, supervision system and corporate governance structure is not perfect.This paper aims to find if there exists opportunistic market timing behavior in the equity incentive plan based on examples of LHKJ and TCBJ, analyzing three indexes, namely, CAR Value Distribution, Information Disclosure Features and Earnings Management Characteristic, before and after the release of the stock option incentive draft plan. In the aspect of CAR Value Distribution,the stock option incentive draft plan announcement is considered as the event day, using event study method, we calculate the CAR value of the adjacent window period and find the changing opportunistic market timing behavior tendency, pictured as rising trend after falling period before and after the release of the stock option incentive draft plan; In the aspect of Information Disclosure Features, we calculate the year growth rate and the chain growth rate of quarter net profit before and after the release of the draft plan, in which, the positive growth rate is recognized as “good news”, while the negative growth rate is valued as “bad news”. Results show that before the release of the draft plan the growth rate of quarter net profit is negative, however, the index is positive after the release of draft plan, proving that the case company reveals bad news in advance and delays to announce good news in opportunistic market timing behavior before and after the release of draft plan; In the aspect of Earnings Management Characteristic, mainly analyzing the year growth rate and chain growth rate of quarter non‐recurring items and quarter accruals profit items before and after the release of draft plan, we find that there exists downward earnings management behavior in the case company. Considering our study in these three aspects, we conclude that in the stock option incentive plan the management of both case company aims to maximize their own earnings in opportunistic market timing behavior.Finally, considering the case study results that opportunistic market timing behavior exists in the equity incentive plan of Chinese listed company, this paper gives some advice on how to improve the stock option incentive plan with regard to corporate governance mechanism,the effectiveness of the securities market and exercise price setting mechanism.