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

Yujun Lian, Zhi Su, Yuedong Gu
2011 Frontiers of Business Research in China  
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
more » ... ficantly 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. Keywords equity incentives, firm performance, propensity score matching, bootstrap 1 Prior to the stock market reform, the Chinese domestic A-shares were divided into tradable and non-tradable shares with identical cash flow and voting rights. Non-tradable shareholders represent the government, holding about a two-thirds majority, and manage the firms, while tradable shareholders have little power to affect the decisions made by non-tradable shareholders. On April 29, 2005, the CSRC announced a program by which non-tradable shares would be converted into tradable shares. Holders of the non-tradable shares negotiated a compensation plan with holders of the tradable shares in order to make their shares tradable. By the end of 2006, the process was essentially complete, with over 95% of the affected companies completed the conversion (see Yeh, Shu, Lee and Su (2009), and Li, Wang, Cheung and Jiang (2010) for details).
doi:10.1007/s11782-011-0131-6 fatcat:pfea7ymoanbxfpj3izxrrrij5e