寫作與投稿整體構(gòu)思psm

1、Front. Bus. Res. China 2011, 5(2): 266290 10.1007/s11782-011-0131-6Yujun Lian, Zhi Su, Yuedong GuEvaluating the Effects of Equity Incentives Using PSM: Evidence from China Higher Education Press and Springer-Verlag 2011AbstractThis p performance in Chir investigates the effects of equity incentives

2、on firmlisted firms. We address the sle selection problem byemploying the propensity score matching methodology. Results showt, (1)On the whole, performance isitively related to equity incentives even aftercontrolling for sle selection bias; (2) The final control rights have animportant impact on th

3、e effects of equity incentives. The execution of equityincentives in privay owned firms can significantly decreasency costsbetn shareholders and managers, but such effects cannot be observed inse-owned firms; (3) Effects of equity incentives depend on the incentive type, t is, comparing to stock-bas

4、ed incentives, option-based incentives can reduce ncy costs significantly, thus are more effective; (4) Ownership structurealso has important impacts on the effects of equity incentives. decrease in firms with more decentralized ownership after incentive, while in concentrated firms the effect is ne

5、gligible.ncy costs roducing equityKeywordsequity incentives, firm performance, propensity bootstrapscore matching,Received June 9, 2010Yujun Lian () Lingnan College, Sun Ya: lianyjUniversity, Guangzhou 510275, ChinaZhi SuSchool of S istics, Centra:iversity of Finance and Economics, Beijing 100081, C

6、hinaYuedong GuSchool of Economics and Finance, Xian Jiaotong University, Xian 710063, China:RESEARCH ARTICLEEvaluating the Effects of Equity Incentives using PSM: Evidence from China2671roductionEquity incentives are widely adopted in firms of the developed countries to aligntheerests of management

7、with those of shareholders in order to improve firmperformance. Up till January 2006, Chisecurity regulations precluded listedfirms from offering equity incentive plans to management (Ke, Rui and Yu, 2009).In late 2005, the China Securities Regulatory Commis(CSRC) made certainrevis to its Corporatio

8、n Regulations and Security Regulations, and releasednew revishe“Regulation of Equity Incentive Plans (trial)”(REIP) in January, 2006. Under the revised regulations, finanl marketconditions and the legal environmen have made itsible for Chive improved dramatically. New conditions listed firms to adop

9、t equity incentive plans.-tradable shares,1 (2) changesThese include: (1) ongoing reform ofheregulations shares witht allow firms to repurchase shares and allow management to tradeheir terms, and (3) breakthroughshe capital systemvemade itsible for firms to adopt equity incentive plans.At present, e

10、mpirical studies regarding the effectiveness of such plans are limited and inconclusive. Based on 34 observations after the release of REIP,and Li (2008) findt equity incentive plans cannot increase the value of Chilisted firms. However, the study does not control for the sle selection bias and ve a

11、dopted equitysmall sias. By focusing on Chilisted firmsincentive plans from 2001 to 2006, Cheng and Xia (2008) findt equityincentive plans canincrease firm value. The effects are further enhanced bythe ongoing reform of the split share structure. However, before 2006, Chi listed firms could informal

12、ly offer equity incentive plans to management. Thus,some of their observations are prior to the release of REIP. He (2008) findst nChilisted firms prefer to choose standardized incentive plans ratherindividual plans for each executive. This tendency is more obvious in small firms or firms with highl

13、y concentrated ownership. Ke et al. (2009) compare firms cross-listed in both domestic and foreign markets with firms listed only in China.They findt the ability to offer equity incentive planshe foreign market is animportant determinant for Chifirms to choose cross-listing. Additionally,1Prior to t

14、he stock market reform, the Chidomestic A-shares were dividedo tradableand-tradable shares with identical cash flow and voting rights.-tradable shareholdersrepresent theernment, holding abouwo-thirds majority, and manage the firms, whiletradable shareholders have littleerto affect the decis made by-

15、tradable-tradableshareholders. On April 29, 2005, the CSRC announced a program by whichshares would be convertedo tradable shares. Holders of the-tradable shares negotiated acompensation plan with holders of the tradable shares in order to make their shares tradable.Byof 2006, the pros was essential

16、ly complete, with over 95% of the affectedcompanies completed the conver(see Yeh, Shu, Lee and Su (2009), and Li, Wang,Cheung and Jiang (2010) for details).268Yujun Lian, Zhi Su, Yuedong Guadopting this plan can significantly increase shareholders wealth, but it cannot improve firm performance, as p

17、roxied by ROA.The literature has demonstrated theoreticallyt equity incentive plans caneffectively improve firm performance (e.g., Baker, Jesen and Murphy, 1988; Shivdasani, 2002; among others). A potential problem in empirical studies on thistopic regarding Chilisted firms ist prior studies do not

18、control for smallsias. Since this plan is still relatively new, only a limited number of firmshave adopted it. Thus, the sle size is small. The second concern, which is moreimportant, is the sle selection biased in Heckman (1979). Morespecifically, firms with good prior performance are more inclined

19、 to adopt equity incentive plans. Consequently, observed improved performance may be driven byother reasons, rathern the plan itself. Surprisingly, there is little literatureconcerns this problem, yet little related evidence is provided.his study, we address the sle selection bias by applying the pr

20、opensityscore matching approach (PSM). Additionally, we use the Bootstrap method tocontrol for the small sias. We investigate the following ies., canfirms increase value by adopting equity incentive plans? Second, how does the type of the plan and the ownership structure change the effect of the pla

21、firmperformance? Third, what drives the effectiveness of the plan? We findt equityincentive plans canimprove firm performance, as measured by ROE.However, this effectiveness is stronger in firmst offer option plans or in firmswidecentralized ownership structure. Additionally, equity incentive plansr

22、esult in reduced agency costs and increased investment in fixed assets.The rest of this pr proceeds as follows: Section 2 reviews the literature anddevelops the hypotheses. Section 3 presents the experimental design andeconometric method. Section 4 describes the sle selection and variablemeasurement

23、. Section 5 discusses the results, followed by the Section 6.inLiterature Review and Hypotheses DevelopmentEquity Based Compensation and Firm PerformanceThe prior literature has shownt equity incentive plans can effectively improvefirm performancehe United S es (Murphy, 1999; Core, Guay and Larcker,

24、2003; Frydman and Saks, 2010). Win equity incentive plan in place, agencycosts can be mitigated, since management not only tends to align theirerestswith those of shareholders, but also is motivated to focus, not on short term, but on long term firm performance.The literature regarding the effective

25、ness of equity incentive plans in China is limited and inconclusive. One major concern of the finanl market in China isEvaluating the Effects of Equity Incentives using PSM: Evidence from China269t theernmens a large amount of control over it, however, there is still alack of superviof finanl market

26、s. Furthermore, theernment generallynot only controls a large portion of shares, but also nominates the management. This can result in corruption and management behavior of over spending andmisuse of funds. Thus, agency costs are high in Chi incentive plans seem to be a solution to this problem. Wil

27、isted firms. Equity promise of shares,management is motivated to make decis for shareholders, including themselves.Therefore, Chilisted firms should have betterformance after adopting anequity incentive plan (Yu, 2006). Empirical studies generally support this view. Thestock market generally respond

28、sitively to the announcement of the plan (Cuiand Zhang, 2008; Zhang and Zheng, 2008). Meanwhile, a few studies arguetequity incentive plans can incur negative effects on corporations due to the uniqueernantructure in Chilisted firms. For exle, Yu and Gu (2001) findt equity incentive plans can increa

29、se the shareholdings of management and thus make the market less liquid. This can make the “insiders control” problem moresevere. L and Zhao (2008) arguet with equity incentive plans, managementhas more incentive to manipulate earnings and utilize “window-dressing” of firm performance.However, most

30、empirical studies focus on horizons prior to the release of REIPin January, 2006. It is generally beved by market participantst the operationof corporations hase more efficient in recent years due to (1) REIP, therevised Corporation Regulations, and espelly (2) reform of the split sharestructure, a

31、major reformhe Chicapital markett is expected to resolveproblems prevailinghe market for a long time. Hence, under the new capitalsystem and market environment, equity incentive plans are expected to motivatemanagement to enhan Based on the abovehareholder value.ysis,roe ourhypothesis:H1Equity incen

32、tive plans can improve firm performance in Chi firms.listed2.2The Impact of Final Control Rights on Equity Based CompensationBefore entering the market as listed firms, the majority of Chifirms areowned by theernment, which also has final ownership control rights, evenafter those firms have been tra

33、dedhe market. Along with the development ofthe economy, more and more private firms have been listedhe market. Consequently, the final control rights of those firms belong to the majorshareholders. We arguet the variations of final ownership control rights couldhave varying impacts on the effectiven

34、ess of equity incentive plans.In order to make an equity incentive plan effective, three nesary conditionshave to be met (Yu, 2006)., there is a competitive market for management,270Yujun Lian, Zhi Su, Yuedong Gufrom which all management is chosen. Second, management is motivated by economic incenti

35、ves, not by other formats of incentives. Third, thfunctions well. This meanst management is under the superviof boardmembers. However, the above three conditions cannot be satisfied amongChilisted firms controlled by theernment. For exle, unlikeheUnited Ses, there is not a competitive market for man

36、agement in China. Mostof those chosen for management are nominated by theernment directly,resulting ratheranagemenving a greatererest in satisfying theernment,n shareholders. Thus, equity incentive plans will not be as effective inthose firms as in firms controlled by shareholders, since the managem

37、enthelatter, nominated by thrathern theernment, is expected torepresent shareholders to increase shareholder value.Based on the aboveysis,roe our second hypothesis:H2Equity incentive plans are more effective in private firmsn insed-owned firms.2.3The Effectiveness and Types of Equity Incentive Plans

38、A series of empirical studies have shownt the effectiveness of equityincentive plans depends on the type of the plan. For ex le, Goering (1996) demonstrates theoretically t (1) an optimum choice of a plan re s on the characteristics of a specific management, and (2) different types of plans areassot

39、ed with varying results. Lazear (2000), Barron and Waddell (2003, 2008)also prove these pos.In China, firms can choose one of four types of equity incentive plans: (a) management stock options, (b) shares transferred to management fromshareholders, (c) shares newly ied just for management, or (d) sh

40、arespurchased for management from the market. In order to simplify the followingdiscus, we classify themo two categories: (1) option plans (consisting of(a) above), and (2) share plans (consisting of (b), (c) and (d) above).In comparison with share plans, option plans can be more effective, due to t

41、hefollowing reasons., option plans are more attractive to repuionmanagement (Oyer and Schaefer, 2005). With option rewards, managemensmore incentive to improve firm performancehe long run. More specifically, ifstock prido not accelerate, option plans have no value to management,however, with share p

42、lans, management can retain certain value regardless of the stock price movement. Additionally, with option plans, management tends tochoose more risky projects to boost up stock pri. Byng so, the potentialinsufficient investment problem, due to the risk adverse nature of management, could be resolv

43、ed (Hall and Murphy, 2003). Second, option plans can increase the retention rate of management. Third, option plans can help alleviate theEvaluating the Effects of Equity Incentives using PSM: Evidence from China271finanl constras (Core and Guay, 2001; Kato, Lemmon, Luo and Schallheim,2005). Given t

44、he factt the profitability of listed firms in China is generallylow, which grey limits their market is far from perfect, whiernal financing capacity, and the Chicapital ade it difficult for the majority of Chilisted firms to i expect the Chie new shareshe market (Lian and Cg, 2008), we thuslisted fi

45、rms tend to adopt option plans relative to stock plans.Based on the aboveysis,roe our third hypothesis:H3Option plans are more effective performance.n share plans in improving firm2.4 Shareholding Concentration and the Effectiveness of Equity Incentive PlansOne pure of equity incentive plans is to m

46、itigate agency costs. However,agency costs vary with ownership structure. Variations in ownership structure can result in different effects of equity incentive plans.Chilisted firms have two distinctive characteristics., ownership ishighly concentrated. This is more severe in firms controlled by the

47、ernment.Second, insiders areerful and have tight control over firms. The above twofeatures could make equity incentive plans less effectiven expected.,when ownership is highly concentrated, big shareholders play a significant role in firms. This makes the role of both management and equity incentive

48、 plans lesssignificant. Mehran (1995) findst with the existence of large shareholders,firms offer fewer options. Ke, Petroni and Safieddine (1999) arguet largeshareholders can supervise managemenlower cost. This makes motivatingmanagement with option plans unimportant. Thus, large shareholders and o

49、ption plans seem to be the replacement of each other. Second, when shares are highlyconcentrated, controlling shareholders (espellyernment as a majorcontroller) generally have goals othernt of management. Under theseconditions, option plans are useless (Ke et al., 1999). For exle, the goal ofernment

50、 as the controlling shareholder might be to retain all employees tomaahe prosperity of the society, etc. This is not feasible if managemenstotal control of the firm. Therefore, option plans work better when the ownershipis more scattered.hose firms, the goals of management and the shareholderscould

51、be easily aligned, and thus agency costs could be reduced. Third, firms with highly concentrated ownership are vulnerable to “tunneling,” a kind offinanl fraud in which a group of major shareholders of a publicly tradedcompany orderst the company sell off its assets to a second company, ownedby the

52、group of shareholders, at unreasonably low pri. The shareholderstypically own the second company outright, and thus profit from the otherwisedisastrous sale.he event such a scheme is underway, managemens noincentive to enhantockholder value, and equity incentive plans are, of course,272Yujun Lian, Z

53、hi Su, Yuedong Gunot applicable. Rational management would rather quit or take no efforts.Based on the aboveysis,roe our fourth hypothesis:H4The effects of equity incentive plans are negatively related to theconcentration of ownership.3MethodologyTo empirically test the hypotheses proed above, we cl

54、assify the slesotwo groups: (1) The incentive group, including firms with equity incentive plans, and (2) the control group, including firms without such plans. As mentionedabove, it is nesary to control for sle selection bias. We apply thepropensity score matching (PSM) method developed by Rosenbau

55、m and Rubin (1983). Using this approach, we can obtain propensity scores (PS), which measure the extent of matching of the incentive group and the control group inmulti-dimens.he following, we brieflyroduce how to calculate PS values, followed bydiscuss regarding the three matching approaches and th

56、e average effect oftreatment on the treated (ATT).3.1Propensity ScoreThe propensity score is defined as “the conditional probability of receiving a treatment given pre-treatment characteristics” by Rosenbaum and Rubin (1983).p( X ) PrD 1| X ED | X ,(1)where X is the multidimenal vector of characteri

57、stics of the control group, Dis the indicator variable, which equals 1 if a firm adopts an equity incentive plan and 0 otherwise. Theoretically, if we can get the estimates of propensity scorep(Xi) (we will discuss this i estimated by the differene in details of the potentialhe next section), the AT

58、T can be es of the incentive group andthe control group (Becker and Ichino, 2002),ATT EY1i Y0i | Di 1 E EY1i Y0i | Di 1, p( Xi ) E EY1i | Di 1, p( Xi ) EY0i | Di 0, p( Xi ) | Di 1,(2)where Y1i and Y0i represent the potential control group, respectively.es of the incentive group and theTo estimate th

59、e PS score, we follow Dehejia and Wahba (2002) and Beckerand Ichino (2002) and use the Logit mwith the following steps.We start with estimating probabilities using the Logit m,Evaluating the Effects of Equity Incentives using PSM: Evidence from China273exp( Xi ) Pr(D 1| X ) p( X ,(3)iii1 exp( X )iwh

60、ere X is the multidimenal vector of independent variables whiayaffect the propensity of firms to implement equity incentive plans, and is thevector of coefficients. The propensity score (PS) is the predicted values of theLogit m.3.2Matching MethodsWe cannot estimate the ATT oferest directly using (2