- Research Article
Evaluating the effects of equity incentives using PSM: Evidence from China
Frontiers of Business Research in China volume 5, pages 266–290 (2011)
This paper investigates the effects of equity incentives on firm performance in Chinese listed firms. We address the sample selection problem by employing the propensity score matching methodology. Results show that, (1) On the whole, performance is positively related to equity incentives even after controlling for sample selection bias; (2) The final control rights have an important impact on the effects of equity incentives. The execution of equity incentives in privately owned firms can significantly decrease the agency costs between shareholders and managers, but such effects cannot be observed in state-owned firms; (3) Effects of equity incentives depend on the incentive type, that is, comparing to stock-based incentives, option-based incentives can reduce the agency costs significantly, thus are more effective; (4) Ownership structure also has important impacts on the effects of equity incentives. The agency costs decrease in firms with more decentralized ownership after introducing equity incentive, while in concentrated firms the effect is negligible.
Abadie, A., Drukker, D., Herr, J., & Imbens, G. 2004. Implementing matching estimators for average treatment effects in stata. The Stata Journal, 4(3): 290–311.
Abadie, A., & Imbens, G. 2006. Large sample properties of matching estimators for average treatment effects. Econometrica, 74(1): 235–267.
Baker, G., Jensen, M., & Murphy, K. 1988. Compensation and incentives: Practice vs. Theory. Journal of Finance, 43(3): 593–616.
Barron, J. M., & Waddell, G. R. 2003. Executive rank, pay and project selection. Journal of Financial Economics, 67(2): 305–349.
Barron, J. M., & Waddell, G. R. 2008. Work hard, not smart: Stock options in executive compensation. Journal of Economic Behavior & Organization, 66(3–4): 767–790.
Becker, S., & Ichino, A. 2002. Estimation of average treatment effects based on propensity scores. The Stata Journal, 2(4): 358–377.
Cheng, Z. 程仲鸣, & Xia, Y. 夏银桂. 2008. 制度变迁、国家控股与股权激励 (Institutional change, state block-holder and managerial equity incentives). 南开管理评论 (Nankai Business Review), 11(4): 89–95.
Core, J., Guay, W., & Larcker, D. 2003. Executive equity compensation and incentives: A survey. Economic Policy Review, 9(1): 27–50.
Core, J. E., & Guay, W. R. 2001. Stock option plans for non-executive employees. Journal of Financial Economics, 61(2): 253–287.
Cui, M. 崔明会, & Zhang, B. 张兵. 2008. 上市公司股权激励的短期财富效应研究 (The short-term wealth effect of equity incentive in listed companies). 经济研究导刊 (Economic Research Guide), (14): 95–98.
Dehejia, R. H., & Wahba, S. 2002. Propensity score-matching methods for nonexperimental causal studies. Review of Economics and Statistics, 84(1): 151–161.
Efron, B., & Tibshirani, R. 1993. An introduction to the bootstrap. New York: Chapmann & Hall.
Fawcett, T. 2006. An introduction to ROC analysis. Pattern recognition letters, 27(8): 861–874.
Frydman, C., & Saks, R. 2010. Executive compensation: A new view from a long-term perspective, 1936–2005. Review of Financial Studies, 23(5): 2099–2138.
Goering, G. E. 1996. Managerial style and the strategic choice of executive incentives. Managerial and Decision Economics, 17(1): 71–82.
Gomes, J. 2001. Financing investment. American Economic Review, 91(5): 1263–1285.
Hall, B. J., & Murphy, K. J. 2003. The trouble with stock options. Journal of Economic Perspectives, 17(3): 49–70.
He, F. 何凡. 2008. 高管层激励股权分布结构及其成因 (Research on the structure and causes of top management equity incentives). 当代经济科学 (Modern Economic Science), 30(6): 98–103.
Heckman, J. 1979. Sample selection bias as a specification error. Econometrica, 47(1): 153–161.
Hosmer, D., & Lemeshow, S. 2000. Applied logistic regression. New York: John Wiley & Sons, Inc.
Kato, H., Lemmon, M., Luo, M., & Schallheim, J. 2005. An empirical examination of the costs and benefits of executive stock options: Evidence from Japan. Journal of Financial Economics, 78(2): 435–461.
Ke, B., Petroni, K., & Safieddine, A. 1999. Ownership concentration and sensitivity of executive pay to accounting performance measures: Evidence from publicly and privately-held insurance companies. Journal of Accounting and Economics, 28(2): 185–209.
Ke, B., Rui, O., & Yu, W. 2009. Hong Kong stock listing and the sensitivity of managerial compensation to firm performance in state-controlled chinese firms. Working Paper, Pennsylvania State University.
Lazear, E. P. 2000. The power of incentives. American Economic Review, 90(2): 410–414.
Li, K., Wang, T., Cheung, Y., & Jiang, P. 2010. Privatization and risk sharing: Evidence from the split share structure reform in china. Review of Financial Studies, forthcoming.
Lian, Y., & Chung, C. F. 2008. Are Chinese listed firms over-investing? SSRN working paper, Available at SSRN: http://ssrn.com/abstract=1296462
Lü, C. 吕长江, & Zhao, Y. 赵宇恒. 2008. 国有企业管理者激励效应研究 (A study on the effect of the incentive given to managers of state-owned enterprises). 管理世界 (Management World), (11): 99–109.
Mehran, H. 1995. Executive compensation structure, ownership, and firm performance. Journal of Financial Economics, 38(2): 163–184.
Murphy, K. 1999. Executive compensation. Handbooks in Economics, (5): 2485–2566.
Oyer, P., & Schaefer, S. 2005. Why do some firms give stock options to all employees? An empirical examination of alternative theories. Journal of Financial Economics, 76(1): 99–133.
Qu, X., & Zhang, G. 2010. Measuring the convergence of national accounting standards with international financial reporting standards: The application of fuzzy clustering analysis. The International Journal of Accounting, 45(3): 334–355.
Rosenbaum, P., & Rubin. D. 1983. The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1): 41–55.
Shivdasani, A. 2002. The economics of executive compensation. Journal of Finance, 57(2): 1023–1028.
Stürmer, T., Joshi, M., Glynn, R., Avorn, J., Rothman, K., & Schneeweiss, S. 2006. A review of the application of propensity score methods yielded increasing use, advantages in specific settings, but not substantially different estimates compared with conventional multivariable methods. Journal of Clinical Epidemiology, 59(5): 437.
Stein, R. 2005. The relationship between default prediction and lending profits: Integrating ROC analysis and loan pricing. Journal of Banking and Finance, 29(5): 1213–1236.
Tzioumis, K. 2008. Why do firms adopt CEO stock options? Evidence from the United States. Journal of Economic Behavior & Organization, 68(1): 100–111.
Villalonga, B. 2004. Does diversification cause the “diversification discount”? Financial Management, 33(2): 5–27.
Xia, J. 夏纪军, & Zhang, Y. 张晏. 2008. 控制权与激励的冲突—兼对股权激励有效性 的实证分析 (The conflicts between control rights and incentives: An empirical analysis on the effect of stock incentives in china). 经济研究 (Economic Research), (3): 87–98.
Yang, H. 杨惠贤, & Li, L. 李丽瑛. 2008. 我国上市公司股权激励及其绩效的实证研究 (An empirical analysis of the effects of equity incentive plans in chinese listed firms). 中国 管理信息化 (China Management Informationization), 11(23): 40–42.
Yeh, Y. H., Shu, P. G., Lee, T. S., & Su, Y. H. 2009. Non-tradable share reform and corporate governance in the chinese stock market. Corporate Governance: An International Review, 17(4): 457–475.
Yu, D. 于东智, & Gu, L. 谷立日. 2001. 上市公司管理层持股的激励效用及影响因素 (Influence factors of managerial ownership and effectiveness of stimulation). 经济理论与 经济管理 (Economic Theory and Business Management), (9): 24–31.
Yu, H. 俞鸿琳. 2006. 国有上市公司管理者股权激励效应的实证检验 (The effects of equity incentive in chinese state-owned listed firms: An empirical analysis). 经济科学 (Economy Science), (1): 108–116.
Zhang, Y. 张颖, & Zheng, X. 郑学清. 2008. 股权激励的市场反应及其内幕交易的实证 研究 (An empirical study on the market reaction of equity incentive and insider trading). 华东经济管理 (East China Economic Management), 22(12): 155–158.
About this article
Cite this article
Lian, Y., Su, Z. & Gu, Y. Evaluating the effects of equity incentives using PSM: Evidence from China. Front. Bus. Res. China 5, 266–290 (2011). https://doi.org/10.1007/s11782-011-0131-6
- equity incentives
- firm performance
- propensity score matching