Equity Incentive And Corporate Risk-taking

Risk-taking has a significant impact on company’s value. As the company’s key decision maker, the risk-taking propensity of the CEO largely determines what choices a company will make about high risk projects. Under the separation of management and ownership of modern enterprises, the agency conflicts between company shareholders and CEO also reflect in the acceptance of corporate risk-taking level. Considered as risk-averse, CEO tends to accept lower corporate risk-taking than shareholders. By giving a certain residual claim to CEO,equity incentive can alleviate the interest conflicts between shareholders and CEO, improving their willingness to accept risk projects of corporate. However the scholars have found that by using their power, managers could seek rent in their incentive compensation. So, as a rational economic man,when the CEO has power to meet his aspirations and conduct low risk behavior, will the equity incentive still have an ideal effect on improving corporate risk-taking?Using the unbalanced panel data of listed companies from 2008 to 2014, and the panel regression analysis method, this article empirically examines the relationship between equity incentive and corporate risk-taking from the perspective of CEO power. The result shows that, CEO equity incentive is positively correlated with corporate future risk-taking under the conditions of full sample, it means the equity incentive to CEO in our a-share listed company has a long incentive effect, and it is beneficial to a company’s long-term development. Further including CEO power in the equity incentive effects research framework, we find that CEO power will weaken the positive effect of equity incentive on corporate risk-taking. That is, with the CEO power increasing, the positive relationship between equity incentive and corporate risk-taking will be reduced. Considering that internal and external governance will affect the CEO power jointly, we divide the whole samples into two groups by the industry competitive level, and conduct regression test separately, finally we find in the companies faced with lower industry competition, CEO power will significantly weaken the positive effect of equity incentive, while in the the companies faced with higher industry competition, the influence of CEO power isn’t remarkable.This result means that in alleviating agency problems, it needs the cooperation of internal and external governance. The main contribution of this paper is:First, through building an act path of how equity incentive affects enterprise performances, and taking CEO power into the research framework at the mean while, this article enriches the domestic studies on equity incentive effects and the impacts of CEO power, moreover it makes a more comprehensive understanding of actual effects of equity incentive; Second, through comparing the effects of CEO power on equity incentive in different groups divided by industry competitive level, it confirms the governance effects of external industry competition to CEO power; In the last, this research focuses on CEO, thus avoiding certain research bias rising from the differences in company’s management personnel constitute or corresponding equity incentive design, making the research comparable and more reliable.