Research On The Effect Of Equity Incentives For The Demand Of External Audit

Since the reform of the shareholder structure was completed by the end of 2005,2011-2015 tends to be the most active year of equity incentive, for the CSRC assumes equity incentive to be one of the Five Prescription for the bailout during stock market crash. The company’s performance has improved since 2011, so listed companies implemented equity incentive plans one after another to improve their performance. As an important means of corporate governance, equity incentive may deal with the agent conflicts well, serve as an effective long-term incentive for professional managers, and align the interests between managers and shareholders. Meanwhile, audit plays a role in corporate’s outside supervising and assurance, and company tends to seek the high-quality audit to solve the corporate agent conflicts. As the important corporate governance mechanism in a modern enterprise, they both play the similar role in easing agent conflicts, so the question is what the relationships between them are. There has been little study about the relationship between them, so focused on how equity incentive contract in incentive contract affects the demand for external audit, this paper aims to try to improve the mechanism of incentive for managers in listed company in China, and give full play to the audit role of securities market. This paper studies the equity incentive from an audit perspective, provides a new thought to design the equity incentive mechanism for executives, and makes some suggestions on the choice of management incentive implementation.Through studies on equity incentive and eternal audit, this paper infers that there exists positive correlation between the intensity of equity incentive and the demand for external audit in theory, from principal agent theory and incompleteness of contract perspective. This paper chooses Chinese listed companies of A-stock market from 2012 to 2014 as samples, and analyzes the correlation between the intensity of equity incentive and the demand for external audit by the least square method. We use a formula to measure the intensity of equity incentive,and empirically study how demand for high-quality audit relate to the intensity of equity incentive, by the means of management direct holding and restricted stock plan respectively. Ten accounting firms, which were assessed by the CPA association at the end of 2014, are used as substitution variables of demand for high-quality external audit.The empirical study validates the theoretical analysis.It is found in this paper that there exists positive correlation between the intensity of equity incentive and the demand for external audit. It is also found that after the implementations of executive incentive, state-owned listed company’s demand for high-quality external audit reduce more significantly comparing to Non-state-owned enterprises. Based on the empirical results, we suggest that Enterprises should strengthen corporate governance by making proper equity incentive contract according to company’s actual conditions, and also strengthen the external oversight at the same time, to prevent audit conspiracy, reduce the cost of corporate governance and promote the value of company.