Technology and Investment, 2014, 5, 26-31
Published Online February 2014 (www.scirp/journal/ti)
dx.doi/10.4236/ti.2014.51004
An Empirical Study on the Effects of Equity Incentive of the Listed Corporations in the SME Board of China —An Empirical Analysis Bad on the View of Earnings Management
Lixin Xu, Wenqin Cui
School of Management, University of Science and Technology of China, Hefei, China
Email:
Received October 29, 2013; revid November 29, 2013; accepted December 6, 2013
Copyright © 2014 Lixin Xu, Wenqin Cui. This is an open access article distributed under the Creative Commons Attribution Licen, which permits unrestricted u, distribution, and reproduction in any medium, provided the original work is properly cited. In accor- dance of the Creative Commons Attribution Licen all Copyrights © 2014 are rerved for SCIRP and the owner of the intellectual property Lixin Xu, Wenqin Cui. All Copyright © 2014 are guarded by law and by SCIRP as a guardian.
ABSTRACT
疏肝益阳胶囊的功效与作用Currently, most rearches are focusing on Shanghai & Shenzhen exchange, and few rearches have been done on the SME board. Besides, while studying the effect of equity incentive, most of the rearchers have ignored the earnings management triggered by stock ownership incentive. This paper takes the SME board companies which have implemented stock ownership incentive as the rearch object. We have ud earnings management to modify the company performance and carried out an empirical rearch to study the effect of stock ownership incentive. Our result shows that without earnings management to modify the company performance, stock own- ership incentive is positively related to company performance. Taking the earnings management into account, the positive correlation relationship between stock ownership incentive and company performance will b
e wea- kened, and stock ownership incentive will stimulate earnings management.
KEYWORDS
Equity Incentive; SME Board; Company Performance; Earnings Management
1. Introduction
In 2005, the Measures for the Administration of Listed Companies Equity Incentive (Trial) issued by China Se- curities Regulatory Commission, marked the beginning of China’s equity incentive. Equity incentive mechanism is an important part of the corporate governance me- chanism. Theoretically, it’s a long-term and encouraging system, and is able to restrict the behavior of executives through institutional arrangements so as to reduce agency cost and improve operation efficiency. However, in real- ity, whether the equity incentive can coordinate the con- flicts of interests between shareholders and managers effectively and improve company performance is still a dispute in the academic circles.
American scholars, Jenn & Meckling (1976) [1] pro- pod to solve the principal-agent problems through eq- uity incentive first and they proved that managers can not realize the maximal benefit of
stockholders, becau they have the motivation to pursue expen in-office. Listed companies implementing equity incentive plans can pro- duce Alignment effect, which brings the interest accor- dance between the executive and external shareholders to effectively solve the principal-agent problems; Mehran (1995) [2] had found that CEO and managerial owner- ship have a positive effect on company performance. Through an empirical study on the randomly lected sample data of 153 companies, there is a positive correla- tion between management shareholding ratio and com- pany performance. Some Himmelberg, Hub- bard & Palia (1999) [3] argued that the equity incentive cannot effectively improve the performance of the com- pany. By the empirical study bad on a panel data sam- ple, they found that the correlation between managerial ownership and corporate performance does not exist or is weak.
The implementation of equity incentive mechanism of China’s listed companies is late and the development time is very short. Studies in this issue are not sufficient
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in China, but are the same with the foreign studies, there are two diametrically opposite conclusions too. Wei Gang (2000) [4] found that Managerial ownership and compa- ny performance are not rema
rkable related or not related to each other; Li Zengquan (2000) [5] proved that China’s listed Corporation manager shareholding is helpful to improve company performance, but since most of the managers shareholding ratio is very low, it can’t perform its functions; through empirical studies, Gu Bing and Zhou Liye (2007) [6] suggested that at prent, long-term effect of executive equity incentive of China’s listed corporations is not obvious; the empirical rearch of Liu Guoliang and Wang Jiasheng (2000) [7] showed that the management equity incentive and firm performance have a positive correlation in statistics.
Throughout the previous rearches, it is not hard to find that, at prent, most of the rearches are focud on Shanghai & Shenzhen exchange, and few rearches have been done on the SME board. With more small and medium size companies listed on the SME board and the improvement of equity incentive mechanism, more and more listed SMEs began to implement equity incentive and became the most active part. Most of the companies of listed SMEs are private enterpris, which are differ- ent from the Main-Board Market mainly compod by state-owned enterpris. As managers in the companies are lected through the system of employment under contract, their appointment is usually cloly related to their job performance. Theoretically, the effectiveness of equity incentive in listed SMEs is different from tho of main board companies. The listed SMEs im自由与法治的关系
plement eq- uity incentive can promote managers to work harder and achieve the interests of the clients. Our rearch takes the listed SMEs as the sample, and hopes to help improve the equity incentive theory.
Besides, a lot of foreign studies show that although equity incentive can improve the corporate governance structure, reduce the agency cost, improve the company performance (Mehran, 1995), it may initiate earnings management effect. The correlation between equity in- centive and company performance shows a significant change if we u earning management to modify the company performance (Cheng and Warfild, 2005) [8]. As equity incentive has some requirements for company performance index, the managers have the motive to ma- nipulate earnings to satisfy vesting conditions, which may hurt ordinary investors’ interests. While studying on the effect of equity incentive, most of the Chine scho- lars have ignored the earnings management triggered by stock ownership incentive. Further rearch shows that most of the data in Chine scholars’ studies were before the year of 2005, but the true n of equity incentive in our country started from the year of 2005 and the rele- vant laws and regulations were issued since 2006. We u the data from the year 2009 to 2011 as the sample and modify company performance bad on earnings management, which effectively avoid the above prob- lems. In conclusion, this paper has certain academic and practical significance.
2. Rearch Design
2.1. Hypothes
Theoretical Model of Jenn and Meckling’s (1976) showed that equity incentive can reduce the agency con- flict, increa the effort level of executive, strengthen the executives and shareholders benefit sharing and risk- sharing mechanism, and improve the company perfor- mance through synergistic effect. But equity incentive can also urge the executives to manipulate earning for their own benefits, which can dampen company perfor- mance. Rearch showed that the ratio of equity and op- tions on total compensation are significantly and posi- tively associated with discretionary accruals (Bergstress- er and Philippon, 2006) [9] and their effects on company performance reduce significantly when the performance is modified by earning management (Cheng and Warfild, 2005), so we make the following assumptions. Hypothesis 1: There is a positive correlation between company performance and incentive ratio.
Hypothesis 2:There is no positive correlation be- tween company performance which is modified by earn- ing management and incentive ratio.
Hypothesis 3: There is a positive correlation between discretionary accruals and incentive ratio.
2.2. Sample and Data
This paper chood the companies tho are listed in Shenzhen Stock Exchange before the year of 2009 and implemented equity incentive during 2009-2011, and re- moved the following companies: 1) ST companies; 2) financial industry companies; 3) tho who aborted the equity incentive plan during 2009-2011; 4) tho who financial data is incomplete. Finally we had 21 listed companies left, then we chood the companies’ report data from 2009 to 2011 as our sample. The index data and other related data in this paper comes from CSMAR and RESSET. Data analysis tool is Stata 11.0.
2.3. Variables Design
1) Explained Variables ()
,,
it it it
ROA ADJROA DA
.
愿你一世无忧a) Company performance (ROA it
total asts to measure company performance.
b) Company performance is modified by earning man- agement (ADJROA it). To obtain a performance measure which is relatively free of manipulation, we need to strip away the impact of potential strategic choices concerning
L. X. XU, W. Q. CUI痰湿吃什么药
28
to depreciation. Therefore, we u ADJROA it as the meas- ure of unmanaged performance. c) Discretionary accruals (|DA it |),
The modified Jones model is ud to estimate normal accruals as a fraction of lagged asts which is from the following equations:
Here we u tool stata11.0 to get the coefficient esti- mates a 0, a 1, a 2, then we get the following equation:
()011121
it
it it it it it it NDA A REV REC A PPE A −−−=∂+∂∆−∆+∂
Discretionary accruals as a fraction of asts, DA it is
then defined as
1it it it it DA TA A NDA −=−
素菜图片
TA it denotes total accruals for firm i in year t ; A it de-
notes total asts for firm i in year t ; REV it denotes change in sales for firm i in year t ; and PPE it denotes property, plan and equipment for firm j in year t ; ΔREV it denotes the deference between main business income firm i in year t and year t − 1; ΔREC it denotes the defe- rence between amount receivable for firm i in year t and year t − 1.
2) Explanatory Variable (Incentive it )
The incentive ratio is lected as the explanatory vari- able, and the method developed by Bergstresr and Phi- lippon (2006) is ud, and it is defined as follows:
()()0.01Pr 0.01Pr it it it it it it it it
Incentive ice Cshares Options ice Cshares Options Cashpay ××+=
××++
谢佩托夫卡Incentive it is incentive ratio. This ratio employs the to- tal holding of stock and options rather than annual grants; Price it is the stock price at the end of the year of compa- ny i . Cshares it and Option it is the amount of stock and option of company i ’s executive in year t ; Cashpay it is the total pay of company i ’s executive in year t . 3) Control variables
In order to control the affection of different character- istic environments on company performance, we choo the following index as control variables.
a) D/A, ast-liability ratio. Ast-liability ratio partly reflects the company’s long-term solvency. When the asts liabilities ratio is high, the executive tends to ma- nipulate earning for relieving the pressure of debt.
b) LnSIZE, ast scale, ledger ast in natural loga- rithm. The company with larger scale will have a com- plex management environment, which will lead to more Agency relationship and a high probability of the occur- rence of earnings management.
c) GROW, company’s growth is EPSG. EPSG is an important measurement index of corporate profitability and can partly reflect company’s future prospects.
d) SH, ownership concentration, the shareholding ratio of the top ten major shareholders. It is common that our listed companies have high shareholding concentration. Part of the directors of the board are reprentatives of the large shareholders, while equity incentive plan should be preplanned by the board of directors, then sharehold- ers’ meeting decides whether to implement the plan after examining it.
2.4. Model Design
To testify the hypothes, we apply panel data and design following regression models on the ba of relevant ref- erences:
012345it it it
ROA Incentive D A
LnSIZE GROW SH ββββββε=++++++ (1)
012345it it it
ADJROA Incentive D A
InSIZE GROW SH γγγγγγε=++++++ (2)
012345it it it
DA Incentive D A
LnSIZE GROW SH σσσσσσε=++++++ (3)
ROA it is the return on total ast of company i in t year; ADJROA it is the return on total ast modified by earning management of company i in t year; it DA is the degree of earning management of company i t .
3. The Empirical Results and Analysis
3.1. Descriptive Statistics
The descriptive statistics of the sample are showed at Table 1, from 2009 to 2011, the average of ROA of the 21 listed companies are 0.130, 0.145, 0.132. In general, the ROA has incread, but ADJROA has apparently declined. The average of Earning management (discre- tionary accruals) from 2009 to 2011 is 0.33, which shows that small and medium size companies listed on the SME board may have negative or positive earnings manage- ment behavior due to different needs. The top ten share- holders in proportion to the average is 45.3583, indicat- ing that small and medium size companies listed on the SME board have a high degree of ownership concentra- tion.
3.2. Regression Results and Analysis
Table 2 shows the result of OLS regression model. Ta- ble 3 shows the result of FE regression model and Table 4 shows the result of RE model. We need to judge the tting form of the model, as we u panel data in this article. Compared OLS model and FE model, we choo FE model, as the F-test values are both significant at the 1% level. Compared FE model and RE model, we choo
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Table 1. Descriptive statistic.
2009 2010 2011
Variable Mean value Standard value Mean value Standard value Mean value Standard value Mean value
ROA it0.130 0.066 0.145 0.076 0.132 0.082 0.135
DA it −0.393 0.295 −0.313 0.323 −0.291 0.405 −0.332
|DA it|0.393 0.295 0.317 0.320 0.291 0.405 0.333
ADJROA it0.522 0.295 0.458 0.343 0.423 0.402 0.468 D/A0.334 0.163 0.335 0.177 0.368 0.1788 0.346
GROW 0.065 0.543 −0.340 5.355 −0.560 2.274 −0.278
LNSIZE 21.051 1.009 21.317 0.976 21.625 1.012 21.331 SH 44.004 25.365 47.284 21.279 44.787 19.367 45.358 Incentive it 0.406 0.324 0.502 0.332 0.436 0.326 0.448
Table 2. The empirical result of the relation of ROA it and Incentive it.
Explained variable ROA it
Explanatory variable OLS FE RE
Incentive it0.0169 (0.70) 0.070 (2.23) 0.0461 (1.76) D/A−0.286*** (−4.64) −0.113* (1.11) −0.116* (−1.58)
GROW 0.004 (1.42) 0.006*** (2.85) 0.005*** (2.63)
LNSIZE 0.025** (2.58) 0.007 (0.257) 0.007 (0.62) SH 0.0007* (0.306) 0.0026 (0.771) 0.0009 (1.05)
R20.449 0.305 0.210 Ftest for all u – i = 0 (p) 5.90 (0.0000) ***
Hausman test Chi2 (5) = 16.71 Prob > Chi2 = 0.0051***
Table 3. The empirical result of relation of ADJROA it and Incentive it.
Explained variable ADJROA it
Explanatory variables OLS FE RE
Incentive it0.254* (1.71) 0.027* (0.29) 0.051* (0.58) D/A 0.032 (0.08) −0.128* (0.42) −0.148* (0.54)
GROW 0.006 (0.36) 0.002 (0.39) 0.002 (0.40)
LNSIZE −0.047 (−0.79) −0.159** (1.10) −0.141*** (−2.82) SH −0.0002 (−0.05) 0.007 (−2.37) 0.006 (1.35)
R20.213 0.344 0.341 Ftest for all u – i = 0 (p) 31.440 (0．000) ***
Hausman test χ2 (5) = 2.62 Prob > χ2 = 0.029**
Table 4. The empirical result of |DA it| and Incentive it.
Explained variable |DA it|
Explanatory variables OLS FE RE
Incentive it0.235 (1.63) 0.040 (0.44) 0.235 (0.10) D/A 0.322 (0.87) 0.013 (0.04) 0.322 (0.41)
GROW 0.002 (0.15) −0.004 (−0.58) 0.002 (−0.59)
LNSIZE −0.072** (−0.25) −0.163** (−2.47 ) −0.001*** (−2.82) SH −0.001 (−1.25) 0.005 (0.73) −0.07 (1.01)
R20.064 0.326 0.064
F test that all u_i = 0: (p) 31.44 (0.000)***
Hausman test χ2 (5) = 3.330 Prob > χ2 = 0.050**
Note: The data in bracket in Tables 2, 3, 4 are t-value; *, **, *** reprent significant at the level of 10%, 5%, 1%; F value is the overall regres-
sion test of significance, F test value is the metric when the model in FE or OLS. Hausman test value is the metric when the model is FE or RE.
FE model, as the Hasman test values are both significant at the level of 1% and 5% level. Consolidated the result of F test and H test, we lected FE model in this paper. Table 2prents regression result with the u of Model (1). According to the statistic result of FE model, there is a positive correlation between incentive ratio and company performance. The correlation coefficient is 0.007 and is significant at the level 5%, which verifies hypo-
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thes 1. Table 3 prents regression result with the u of Model (2). According to the statistic result of FE model, company performance modified by earning man- agement has a positive correlation with earning man- agement (DA), and is significant at the level of 5%, which means that equity is an important cau of earning management. During control variable, whether modified by earning management or not, the coefficient of debt- to-asts ratio is negative and significant at the level 5%, which means that there is an obvious negative correlation between debt-to-asts and company performance; there is a positive correlation between company size and com- pany performance, which shows that the larger the com- pany is, the greater the probability of occurrence of earnings management is. In conclusion, there is a posi- tive correlation between incentive ratio and company performance when the performance is modified. Equity incentive plays a role in improving the performance. The positive correlation between incentive ratio and company performance which strips away DA has decread sig- nificantly. There is a positive correlation between DA and incentive ratio.
4. Conclusion and Suggestions
In order to test the real effect of equity incentive imple- mented in the small and medium-sized listed corpora- tions, the rearch object of this paper was focud on Shenzhen Small & Medium Enterpri
Board listed com- panies instead of Shanghai and Shenzhen stock listed corporations, and the effect of earning management pro- duced by equity incentive was considered during the stu- dy of corporate performance. The analysis of regression results showed that:
1) In general, the equity incentive played a role in im- proving the performance of small and medium-sized listed corporations.
2) Equity incentive can lead the managers to practice earnings management for their own interests.
辛夷坞3) Earning management can partly weaken the effect of equity incentive.
We agree that equity incentive improves the perfor- mance of the small and medium-sized listed corporations. But at the same time, we must also be aware that equity incentive will lead to the phenomenon of earnings man- agement in the implementation process and weaken the incentive effects of equity. In order to perfect the equity incentive mechanism in small and medium-sized board listed companies and let it play a positive role, this paper gives some advice:
1) Strengthen the index tting; establish an effective performance evaluation system. For index tting, the items that cannot be adjusted easily should be chon for the sake of earning managem
ent. We can combine mar- ketability index with non-traditional financial index (stock price, market value and so on) to asss the firm perfor- mance comprehensively.
2) Improve the board of supervisors system. Good and sound system of Board of Supervisors is the foundation of implementing equity incentive. Listed SMEs should t supervision to prevent the operators from the pursuit of shareholder value and their own interests which can have adver impact on shareholders.
3) Perfect related rules and regulations of the equity incentive, and strengthen the supervision. On the one hand, competent authorities should strengthen the super- vision of the disclosure of the listed companies and re- quire the company to fully disclo the equity incentive information; on the other hand, strengthen the inspection of executive’s market manipulation behavior in the equi- ty incentive plan, and enhance the intensity of civil da- mages and criminal penalties.
4) Improve the corporate governance structure, for example the system of company’s compensation com- mittee.
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