Do equity incentives for the managements have impact on stock-pricing efficiency? Evidence from China

• Pages: 703-715
• DOI: https://doi.org/10.1108/IJAIM-03-2020-0031
• Published date: 29 May 2020
• Date: 29 May 2020
• Author: Yue-e Long,Xinyi Huang
• Subject Matter: Accounting methods/systems,Accounting & Finance,Accounting/accountancy

Do equity incentives for the

managements have impact on

stock-pricing ef‌f‌iciency? Evidence

from China

Yue-e Long

Business School, Shantou University, Shantou, China, and

Xinyi Huang

Essex Business School, University of Essex, Colchestor, UK

Abstract

Purpose –The purpose of this paper is to investigate the impacts of equity incentive on stock pricing

eff‌iciency, as well as the institutional investors’response to equity incentive and its role in stock pricing

eff‌iciency.

Design/methodology/approach –Using a sample of 1,842 companies that announce implementing

equity incentiveschemes during the period 2009-2018, the authors compare the pricing eff‌iciencybetween the

f‌irms with equity incentive and those without equity incentive, and companies that implement equity

incentive beforeand after the implementation of equity incentive by using multipleregression and propensity

score matching -DID (difference indifference) method. In addition, the multiple regression model is built to

test the responseof institutional investors to equity incentiveand its role in the eff‌iciency of stock pricing.

Findings –The empirical results indicatethat a company’s stock price is inf‌luenced more by f‌irm-specif‌ic

information than systematic factors after it announces a stock-based compensation scheme. Institutional

investors respondpositively to companies that implement equity incentives.Among the companies that have

implement equity incentive, the higher the shareholding ratio of institutional investors, the higher the

eff‌iciencyof stock pricing.

Originality/value –The authors innovatively establish a connection between the implementation of

equity incentive and the operation of stock market. The results imply that besides alleviating the agency

problem, equity incentivescan also improve the eff‌iciency of stock pricing, which provide empirical evidence

to supportthe positive effect of equity incentive.

Keywords Equity incentive, Stock-based compensation, Stock-pricing eff‌iciency

Paper type Research paper

1. Introduction

In publicly held business corporations,because of the “separation of ownership and control”

and the “economic man”hypothesis, managers may not act in the best interests of

shareholders (Jensen and Meckling, 1976). A principal-agent problem exists in almost all

companies operated by professional managers. As the interests of managers is often

inconsistent with that of shareholders, who do not closely monitor the managers, thus

managers commonly act againstthe interests of shareholders. Shahzad et al. (2019) f‌ind that

JEL classif‌ication –G14; G24

We gratefully acknowledge the support of the Humanities and Social Sciences Research Foundation

of the Ministry of Education of the People's Republic of China (Grant No. 15YJA880042).

Impact on

stock-pricing

ef‌f‌iciency

703

Received3 March 2020

Revised19 April 2020

Accepted28 April 2020

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 4, 2020

pp. 703-715

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-03-2020-0031

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