Effectiveness Test Of Equity-based Managerial Incentive:Perspective From Growth Options

In modern enterprises with the separation of ownership and management,equity-based managerial incentive and its effectiveness test mainly based on financial or operating performance are important issues in existing research.The view from Interest Convergence Hypothesis points out that equity-based managerial incentive would encourage executives to make some risk-taking decision,which is valuable for the growth of firms in long run,especially helps firms to capture and even create growth options with high risk and return.In fact,the total assets of the firms can be divided into assets-in-place and growth options.Based on the option pricing theory,the value of growth options would increase with the volatility of the underlying project value,and thus there would exists a positive relation between stock return and the volatility change of return.Further,the positive relation between stock volatility change and stock return is stronger for firms with higher proportion of growth options in total assets.In other words,growth option has an amplifying effect on the positive relation between volatility change and return.For firms that encourage executives to capture and create growth options by implementing equity-based managerial incentive,a possibility is that the amplifying effect of growth options would be strengthened,which can offer insightful evidence on the effectiveness tests about equity-based managerial incentive.Based on the introduction of research background and literature review,this dissertation uses a sample of 2,530 non-financial A-share firms listed in Shanghai and Shenzhen Exchanges during 2006 and 2015 to examine the effectiveness of two ways of equity-based managerial incentive,managerial shareholdings and contingent-equity plan.Firstly,based on the measure of value of growth option by EVA,the paper examines whether equity-based managerial incentive would be helpful for the improvement of value of growth options.Secondly,based on the finding that growth options can strengthen the positive relation between stock volatility change and stock return,the paper furtherly test whether the strengthen effect of growth options is different for firms with different status of equity-based managerial incentive.Overall,the paper provides the evidence supporting Interest Convergence Hypothesis.Descriptive statistics and multivariate regression analysis jointly show that,firms having implemented equity-based managerial incentive(both managerialshareholding and contingent-equity plan)not only have higher growth option value but also are more likely to strengthen the adjusted effect of growth options on the positive relationship between stock volatility change and stock return.Moreover,robust tests controlling endogenous problems by the method of propensity score matching(PSM)and the model of difference-in-difference(DID)show that equity-based managerial incentive really increases the value of growth options.The research not only gives insightful evidence about the test of long-run effectiveness of equity-based managerial incentive,but also provides practical guidance for the implement and evaluation of equity-based managerial incentive from the perspective of interaction between value creation and capital market.