Research On The Relation Between Equity Incentives And Earnings Management Of Listed Firms

As a type of long-term incentive machanism, equity incentive is an effective way to solve the principal-agent problem in modern firms. In China, a series of policies and regulations related to equity incentives are staged since2006, and equity incentives have been more and more widely applied in domestic listed firms. Although equity incentives can effectively stimulate the staffs work enthusiasm, improve company performance and reduce the agent cost, it can also bring some negative problems at the same time. For example, the managers with equity incentives may have the motivation of manipulating accounting surplus to reduce the authorized price, meet the exercise conditions or raise the exercise price. Thus, the relation between equity incentives and earnings management is deeply studied in this paper.First, based on the the contract theory, principal-agent theory, information asymmetry theory and other economic theories, the relation between equity incentives and earnings management are theorically analyzed. Then, the development status, mechanism characteristics and existing problems of domestic equity incentives are analyzed, and the frequently-used earnings management measures in domestic listed firms are summarized. On the above basis, several research hypotheses about the relation between equity incentives and earnings management of listed firms are put forward.120A-share listed firms in Shanghai and Shenzhen stock market that released and successfully implemented equity incentives during2011-2012are selected as samples. Then, the empirical regression analysis model is established, and the extended cross-section modified Jones model is used to measure the degree of earnings management. Several statistical methods are taken in empirical analyzation, such as paired sample T test, multiple linear regression and independent sample T test. Finally, we conclude that:before the annunciation of equity incentive plans, earnings management of listed firms are widely manipulated downward; after the implementation of equity incentives, earnings are widely manipulated upward; the degree of earnings management is significantly positive related to the scope of equity incentives and non-significantly positive related to the duration time; The degree of earnings management of SME board and GEM board firms are significantly greater than the main board firms. In addition, the degree of earnings management after the implementation of equity incentives is positively related to the return on equity, asset-liability ratio, and equity concentration. The degree is negatively related with the independent directors proportion, and we do not find evidances that it has significant relation to the company size and management compensation.Through the theoretical analysis and empirical research results, together with the present situation of the equity incentive mechanism and earnings management in domestic listed firms, several measures are put forward:improving the equity incentives plan to establish a more scientific and reasonable performance measurement and compensation distribution system; strengthening the internal governance structure of listed firms to prevent insider controlling phenomenon; improving the external market and policy environment to strengthen supervision and punishment. The research work in this paper can provide reference for the participants and policymakers in domestic capital market.