The Research on the Nature of Equity Incentive Schemes of Chinese Listed Companies
|School||Zhejiang University of Finance|
|Keywords||Equity Incentive Optimal Bond Management Power Theory Management Rent Extraction|
The separation of ownership and management poses the principal-agent problem. The optimal bond theory claims equity incentive is the best way to resolve the problem, while the management power theory claim the course the incentive plan is made is part of the problem, and the equity incentive is the way that the management extracts rents.The literature document:(1) Over all, the equity incentive schemes by Chinese listed corporate are recognized by investors, and arouse positive market response, which indicates the schemes mitigate the problem. (2) Independent directors do not protect the investors in the scheme. What’s worse, evidence indicates that the more independent directors in the board, the more negative the investors are to the scheme. The management power theory claim that the independent directors are substantively appointed by the management, so the independent directors are grateful to the management and will support management in management remuneration scheme. What’s more, if there are more independent directors in the board, the management can easily rationalize the remuneration scheme. The outrage can not deter management. There is no efficient reputation market in China, independent directors have no incentive to resist the management. The literature suggests the regulator of Chinese capital market should rethink the policy that request listed companies to maintain high ratio independent directors in the board. (3) Management of listed companies that operate high technology and emerging technology business extracts more rent than other listed companies. We believe asset specificity is the reason. The literature suggests the regulator should promulgate specific regulation to regulate the listed companies that operate high technology and emerging technology business in order to protect investors. (4) If the equity concentration is higher, the shareholders would monitor more closely the management in the making of equity incentive scheme, consequently the market will response more positively. (5)China Securities Regulatory Commission promulgates three regulations, which are memorandum 1 about the equity incentive, memorandum 2 about the equity incentive, memorandum 3 about the equity incentive. Our research finds out that the regulations are effective in protecting investors. In the institutional environment of China, the administrative regulation rather than best corporate governance is a more effective way to protect the investors. Although there are drawbacks in administrative regulation, it is the pragmatic way in China. Our research also document that the CSRC is not a tiger without teeth, which is reported by some medias. (6) Nature of ownership significantly matter in the response of market. The equity incentive plan of companies controlled privately arouses more positive response than state owned companies. We believe it is because of the lack of true owner in SOEs and the inner control. Although the shares that are held by the state make it have enough power to monitor the management, but they have no incentive to do so. The consequence of this is that the equity incentive scheme in fact become welfare schemes, and incentive nobody. That’s why the investors are indifferent to the schemes. We suggest the SOEs should be privatized. We conclude that the equity incentive schemes by Chinese listed companies have double natures that generally the schemes harmonies the benefits of management and shareholders, mitigate the principal-agent problem in Chinese listed companies, which is in accordance with the optimal bond theory; however we do notice evidence that the management extracts rent in the schems, which is in accordance with management power theory.