Skip to main content
Frontiers of Business Research in China
Download PDF
  • Research Article
  • Published:

Evaluating the effects of equity incentives using PSM: Evidence from China

Frontiers of Business Research in China volume 5, pages 266–290 (2011)Cite this article

Abstract

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.

References

  • 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.

    Google Scholar 

  • Abadie, A., & Imbens, G. 2006. Large sample properties of matching estimators for average treatment effects. Econometrica, 74(1): 235–267.

    Article  Google Scholar 

  • Baker, G., Jensen, M., & Murphy, K. 1988. Compensation and incentives: Practice vs. Theory. Journal of Finance, 43(3): 593–616.

    Article  Google Scholar 

  • Barron, J. M., & Waddell, G. R. 2003. Executive rank, pay and project selection. Journal of Financial Economics, 67(2): 305–349.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Becker, S., & Ichino, A. 2002. Estimation of average treatment effects based on propensity scores. The Stata Journal, 2(4): 358–377.

    Google Scholar 

  • 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.

    Google Scholar 

  • Core, J., Guay, W., & Larcker, D. 2003. Executive equity compensation and incentives: A survey. Economic Policy Review, 9(1): 27–50.

    Google Scholar 

  • Core, J. E., & Guay, W. R. 2001. Stock option plans for non-executive employees. Journal of Financial Economics, 61(2): 253–287.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Efron, B., & Tibshirani, R. 1993. An introduction to the bootstrap. New York: Chapmann & Hall.

    Google Scholar 

  • Fawcett, T. 2006. An introduction to ROC analysis. Pattern recognition letters, 27(8): 861–874.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Goering, G. E. 1996. Managerial style and the strategic choice of executive incentives. Managerial and Decision Economics, 17(1): 71–82.

    Article  Google Scholar 

  • Gomes, J. 2001. Financing investment. American Economic Review, 91(5): 1263–1285.

    Article  Google Scholar 

  • Hall, B. J., & Murphy, K. J. 2003. The trouble with stock options. Journal of Economic Perspectives, 17(3): 49–70.

    Article  Google Scholar 

  • 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.

    Google Scholar 

  • Heckman, J. 1979. Sample selection bias as a specification error. Econometrica, 47(1): 153–161.

    Article  Google Scholar 

  • Hosmer, D., & Lemeshow, S. 2000. Applied logistic regression. New York: John Wiley & Sons, Inc.

    Book  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Rosenbaum, P., & Rubin. D. 1983. The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1): 41–55.

    Article  Google Scholar 

  • Shivdasani, A. 2002. The economics of executive compensation. Journal of Finance, 57(2): 1023–1028.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Tzioumis, K. 2008. Why do firms adopt CEO stock options? Evidence from the United States. Journal of Economic Behavior & Organization, 68(1): 100–111.

    Article  Google Scholar 

  • Villalonga, B. 2004. Does diversification cause the “diversification discount”? Financial Management, 33(2): 5–27.

    Google Scholar 

  • 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.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Lingnan College, Sun Yat-sen University, Guangzhou, 510275, China

    Yujun Lian

  2. School of Statistics, Central University of Finance and Economics, Beijing, 100081, China

    Zhi Su

  3. School of Economics and Finance, Xi’an Jiaotong University, Xi’an, 710063, China

    Yuedong Gu

Authors
  1. Yujun Lian
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Zhi Su
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Yuedong Gu
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Yujun Lian.

Rights and permissions

Reprints and permissions

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

Download citation

  • Received:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11782-011-0131-6

Keywords