An Empirical Research On The Relationship Among Managerial Power,Equity Incentive And Corporate Performance

The document “Regulation of Equity Incentive Plans(trial)” released by the China Securities Regulatory Commission in late 2005 marked the beginning of formal implementation of equity incentive plans in Chinese listed companies.Afterwards,the China Securities Regulatory Commission released a series of relevant documents to make certain revisions to “Regulation of Equity Incentive Plans(trial)”.It was not until July 2016 that the formal “Regulation of Equity Incentive Plans” was released.With the continuous improvement of the institutional environment for the implementation of equity incentive plans in Chinese listed companies,more and more listed companies have chosen to incentivize their executives through equity incentive plans.The effectiveness of equity incentive plans has become the focus in both theory and practice.The development of Chinese capital market and the corporate governance structures of Chinese listed companies are different from those of Western countries.Whether equity incentive plans are effective in Chinese listed companies has not come to an agreement.Thus this issue deserves our further research.The existing literatures attempt to analyze the effectiveness of equity incentive plans with different theories.According to the optimal contract theory,corporate executives can be given certain residual claims through equity incentive plans by linking executive compensation to company performance,which makes executives and shareholders share the risk of company.Equity incentive plans can not only reconcile the goals of corporate executives and shareholders,but also reduce the supervision costs for shareholders.It is a win-win strategy.Equity incentive plans contribute to reducing agency costs and improving company performance.However,the theory of managerial power indicates that equity incentive plans cannot effectively reduce the agency costs between shareholders and management.Capturing the board of directors,the management will make rent-seeking activities by affecting the design of equity incentive contracts and controlling the implementation process of the plans,thus weaken the effectiveness of equity incentive plans.Equity incentive plans may well be tools for the management to seek self-interest and cannot play the positive role it should have when internal and external supervision mechanisms of the company are weak and managerial power is relatively strong.Managerial power has an important influence on the design and implementation of the companies' equity incentive plans.Based on the analysis above,this paper selects A-share listed companies,which successfully implement equity incentive plans,in Shanghai and Shenzhen stock markets from 2008 to 2015 in China as treatment group,and matches control group for the treatment group using Propensity Score Matching(PSM)method.Then using data of treatment group and control group companies from 2007 to 2016,this paper investigates the relationship among managerial power,equity incentive and corporate performance.The study firstly investigates the relationship between equity incentive and corporate performance.Then constructing a comprehensive index to measure managerial power using Principal Component Analysis method,the study investigates how managerial power affect the relationship between equity incentive and corporate performance.The results show that the implementation of equity incentive plans is beneficial to corporate performance.However,managerial power will significantly weaken the positive relationship between equity incentive and corporate performance.Further research finds that the weakening effect of managerial power on the effectiveness of equity incentive plans is significant in non-state-owned enterprises,while it is not significant in state-owned enterprises.This explains why the effectiveness of equity incentive plans in state-owned enterprises is better than that in non-state-owned enterprises.This paper enriches the existing literatures about the effectiveness of equity incentive plans and may provide certain reference for the implementation of equity incentive plans in the future and the further revision of equity incentive regulations.