Empirical Research On Earnings Management And Equity Incentive Performance Conditions Of Listed Companies In China

Equity incentives are long-term compensation incentives that are often used to mitigate the agency costs and conflicts of interest that result from the conflict between shareholders and managers.In the equity incentive plan,exercise conditions(for a stock option scheme)or unlock conditions(for a restricted stock scheme)are the most important elements,which determine the possibility of the implementation of an equity incentive scheme,even indicate the future growth of the company’s performance.As early as the 1980 s,similar attempts have been made by Chinese companies,but due to the lack of capital markets and the absence of institutions,equity incentives are in a difficult stage of development in the long-term and small-scale exploration.After 2000,equity incentives were understood and used by more and more companies until the official introduction of the “Administrative Measures” in 2016,which provided more comprehensive guidance for the equity incentive behavior of listed companies in China.Past research experience has shown that there are self-interest motives for the company when formulating equity incentive plans.After analysing the equity incentive plan(Draft)and revision draft announced by “Dr.Peng” in 2013,it was found that the company’s amendments to incentives have evidence of self-interested behavior to a certain extent,including:(1)The presentation of financial indicators of performance evaluation conditions were changed from absolute value to relative value;(2)The total cost of the incentive plan and the amortization plan were adjusted;(3)The assessment target of the incentive plan was completed with the help of the expected performance contribution from the asset reorganization of the previous year.It was found that the performance conditions of Dr.Peng’s first assessment period were negative after excluding the performance contribution of asset reorganization,that is,the non-growth performance requirements of listed companies during the first evaluation period.The equity incentive plan sets the reference year for the performance index and the assessment year.Since the first assessment year of the incentive plan is often announced in the same year as the incentive plan.Therefore,it is speculated that when a listed company first designs the evaluation conditions for the equity incentive plan,it may consider in advance the realizability of the exercise of option exercise or restrictive stocks,and there are tendencies to reduce exercise rights or difficulty in unlocking and earnings management practices.This article selects A-share market listed companies that have implemented equity incentives from 2012 to 2015 as research samples,collects and collates performance evaluation conditions in the plans,and classifies the “strict” and “loose” conditions according to the degree of difficulty of the exercise or unlocking.Further analyze the correlation between the degree of difficulty achieved by the earnings management and performance conditions during the period from the base year to the first assessment year in the equity incentive plan.This paper uses accrued operating profit to represent earnings management and uses the most widely used modified JONES model to calculate the level of earnings management of listed companies that implemented equity incentives in 2012-2015.Second,through statistical methods such as logistic regression,the correlations between the managed earnings management level,corporate governance,equity structure indicators,and incentive program assessment conditions were analyzed.The verification results are as follows:(1)Companies with higher levels of earnings management are more relaxed in terms of performance conditions for incentive programs,and the first phase of equity incentives is rewarded;(2)High degree of equity concentration is beneficial in reducing management’s incentive plan The speculative behavior in China has made it difficult to improve performance conditions;(3)When the chairman and general manager are the same person,they tend to adopt more relaxed assessment conditions.This paper proposes proposals for the scheme of equity incentives and the reduction of improper earnings management practices of the company:(1)Establish a stock incentive plan in a rational way,explain the setup framework in the stock incentive plan,and set the exercise rights or unlock conditions for the incentive plan.Considering the combination of financial and non-financial indicators and reducing the space available for earnings management,external factors,development plans,and company strengths need to be taken into consideration in the formulation of indicators to avoid unreasonable incentive conditions;(2)After the announcement of the stock incentive plans of many companies,The plan will still be revised and adjusted.Part of the reason is due to the errata of the plan.Part of it may be pre-executive self-interest behavior of the senior executives.As a result,the revised plan has a tendency to self-interest in comparison with the pre-correction plan.Amendments to the equity incentive plan need to enhance information disclosure and investigation;(3)Start with regulating the operation of listed companies,including beforehand,formulate a corporate structure for compliance,and ensure the independence of management and executives;Good internal control and information disclosure arrangements to protect stakeholders such as shareholders Situation rights and participation;afterwards,following the preparation of pre-planned program implementation,tracking the implementation of the program,with administrative regulation.With the continuous development of China’s capital market,the future companies will have more operating and management methods and equity incentives will become more common.This paper proposes that the future supervision is to control the behavior of earnings management within a reasonable and allowable range,reduce the surplus management space of senior executives for profit,and standardize the operation and management behavior of listed companies.