Equity Incentives and Crash Risk in China’s A-Share Market
-
Jiahua Xu
Abstract
This paper examines the relationship between equity incentives and stock price crash risk in China’s A-Share Market, and finds a significantly positive relationship between equity incentives and crash risk. This result holds true when only executives’ incentives are involved, while the significance fades once non-managerial personnel’s incentives are considered, indicating a tendency for managers to manipulate the stock price when their interests are tied to the market value of the stock. This manipulation, however, can cause the stock price to suffer in subsequent years.
Appendix
A Number of firm years on industry sector level
| Industrial Field | Sector | Number of observations |
|---|---|---|
| Commerce | Accommodation industry | 46 |
| Catering industry | 21 | |
| Retail industry | 475 | |
| Wholesale industry | 458 | |
| Conglomerates | Agriculture | 75 |
| Animal husbandry | 56 | |
| Architectural decoration and other construction industries | 103 | |
| Diversified industries | 154 | |
| Fishery | 46 | |
| Forestry | 25 | |
| Service industry for agriculture, forestry, animal husbandry and fishery | 7 | |
| Industry | Agricultural and sideline food processing industry | 215 |
| Alcohol, beverage and refined tea manufacturing | 244 | |
| Automobile manufacturing | 469 | |
| Chemical fiber manufacturing | 139 | |
| Coal mining and dressing industry | 176 | |
| Electric machinery and equipment manufacturing | 804 | |
| Exploitation auxiliary activities | 50 | |
| Ferrous metal ore mining and dressing industry | 30 | |
| Food manufacturing | 163 | |
| Furniture manufacturing | 33 | |
| Gas production and supply industry | 108 | |
| General equipment manufacturing | 434 | |
| Industries of petroleum processing, coking, and nuclear fuel processing | 84 | |
| Industry of comprehensive utilization of waste resources | 28 | |
| Industry of electric power and heat production and supply | 433 | |
| Industry of ferrous metal smelting and rolling processing | 207 | |
| Industry of non-ferrous metal smelting and rolling processing | 346 | |
| Industry of non-metallic mineral products | 335 | |
| Industry of rubber and plastic products | 197 | |
| Instrument and meter manufacturing | 45 | |
| Leathers, furs, feathers and related products and footwear industry | 29 | |
| Manufacturing of chemical raw materials and chemical products | 856 | |
| Manufacturing of computers, communications and other electronic equipment | 1060 | |
| Manufacturing of railways, ships, aircrafts, spacecrafts and other transportation equipment | 224 | |
| Manufacturing of stationery, industrial arts, sports and entertainment supplies | 36 | |
| Metal product industry | 207 | |
| Non-ferrous metal ore mining and dressing industry | 133 | |
| Oil and natural gas exploitation industry | 35 | |
| Other manufacturing industries | 57 | |
| Papermaking and paper product industry | 150 | |
| Pharmaceutical industry | 816 | |
| Printing and recording media reproduction industry | 44 | |
| Special-purpose equipment manufacturing | 530 | |
| Textile garment and apparel industry | 140 | |
| Textile industry | 207 | |
| Wood processing and wood, bamboo, rattan, Palm fiber, and straw product industry | 45 | |
| Properties | Building construction industry | 6 |
| Civil engineering construction industry | 309 | |
| Real estate industry | 839 | |
| Utilities | Air transport industry | 65 |
| Commercial service industry | 182 | |
| Ecological protection and environmental governance industry | 54 | |
| Education | 14 | |
| Health | 41 | |
| Industry of culture and arts | 21 | |
| Industry of loading/unloading handling and transport agency | 25 | |
| Industry of science and technology popularization and application services | 7 | |
| Industry of software and information technology services | 385 | |
| Internet and related services | 226 | |
| Leasing industry | 15 | |
| Postal service industry | 26 | |
| Press and publishing industry | 85 | |
| Professional technical service industry | 57 | |
| Public facility management industry | 92 | |
| Radio, television, film, and film and television sound recording production industry | 72 | |
| Railway transportation industry | 23 | |
| Research and experimental development | 14 | |
| Road transport industry | 200 | |
| Storage industry | 23 | |
| Telecommunications, radio and television and satellite transmission services | 60 | |
| Water production and supply industry | 89 | |
| Waterway transport industry | 176 | |
| Total | 13,681 |
B meter description
Path of variables in CSMAR
| Series | Database | Query Form | Table | Path |
|---|---|---|---|---|
| China Listed Firms Research Series | Corporate Governance | Basic Information | Equity Incentive Exercise List | 01 |
| Financial Statements | Balance Sheet | Balance Sheet | 02 | |
| Income Statement | Income Statement | 03 | ||
| Financial Indices | Earning Capacity Analysis | Earning Capacity Analysis | 04 | |
| Solvency | Solvency | 05 | ||
| Monographic Study Series | Discretionary Accruals and Nondiscretionary Accruals Database | Basic Data | Basic Data | 06 |
| China Stock Market Series | Stock Trading | Individual Stock Trading | Annual Stock Price & Returns | 07 |
| Monthly Stock Price & Returns | 08 | |||
| Weekly Stock Price & Returns | 09 | |||
| Individual Stock Trading Market Trading | Weekly Market Returns | 10 |
Variable descriptions in CSMAR
| Information from CSMAR (verbatim) | ||||
|---|---|---|---|---|
| Variable | Path | Field Title | Field | Field Description |
| 01 | Total Number of Shares | Nstbfof | ||
| 01 | Ratio of Total Number of Incentive Shares Issued to Total Capital | Protleuq | ||
| 01 | Exercisable/Unlockable Rights for Executives | Exustkta | ||
| 01 | Exercisable/Unlockable Rights for Technicians | Ctbstkta | ||
| 02 | Total Shareholders’ Equity | A003000000 | The sum of all shareholders’ equity items. Used from 1990 onwards. | |
| 02 | Net Fixed Assets | A001212000 | The net amount of Fixed Assets after deducting accumulated depreciation and impairment. It also includes construction contractor’s temporary facilities, software affiliated with computer’s hardware that cost did not measure separately. Used from 2000 onwards. After 2007, the original fixed assets conforming to the definition of investment properties are calculated as investment properties. | |
| 02 | Total Assets | A001000000 | The sum of all asset items. Used from 1990 onwards. | |
| 02 | Net Notes Receivable | A001110000 | The difference between Notes Receivable and its provision for bad debts. Notes Receivable is notes that are neither due nor discounted at banks yet, including trade acceptance and bank acceptance but excluding the endorsed notes receivable. Used from 1991 onwards. | |
| 02 | Net Accounts Receivable | A001111000 | The difference between Accounts Receivable and Provision for Bad Debts of Accounts Receivable. Accounts Receivable is amounts should be received by an enterprise from other companies for sales of goods, products, materials, and services rendered, or project settlement. Used from 2007 onwards. | |
| 03 | Total Operating Revenue | B001100000 | The sum of all revenue arising from operating business of the company. | |
| 04 | Return on Assets B | F050102B | (Total profits + Financial expenses)/Average total assets | |
| Denoted by Null if the denominator is not disclosed or equal to zero. | ||||
| Average total assets = (Beginning total assets + Ending total assets)/2 | ||||
| 05 | Ratio of Long-Term Borrowings to Total Assets | F011301A | Long-term Borrowings/Total Assets | |
| Denoted by Null if the denominator is not disclosed or equal to or below zero. | ||||
| 06 | Total Accrued Profits | Ttlacrul | Total accrued profits = net profit - cash flows from operating activities. | |
| 07 | Annual Negotiable Market Value | Ysmvosd | The number of negotiable share multiplied by its closing price in the year | |
| 08 | Number of Shares Traded in Month | Mnshrtrd | Total number of shares traded in the month | |
| 08 | Market Value of Tradable Shares | Msmvosd | The number of negotiable share multiplied by its monthly closing price, A Share: CNY, SSE B share: USD, SZSE B Share: HKD. | |
| 08 | Monthly Closing Price | Mclsprc | ||
| 09 | Weekly Return With Cash Dividend Reinvested | Wretwd | ||
| 10 | Weekly Market Return With Cash Dividend Reinvested (Current-Value-Weighted) | Wretwdos | ||
Acknowledgement
The author thanks Haina Shi, W. Jean Kwon, Chris Bayer and four anonymous referees for their comments and suggestions, as well as Alexander Goerlt for his editorial assistance.
References
Armstrong, Christopher S., Alan D. Jagolinzer, and David F. Larcker. 2010. “Chief Executive Officer Equity Incentives and Accounting Irregularities.” Journal of Accounting Research 48 (2): 225–271. DOI: 10.1111/j.1475-679X.2009.00361.x.Suche in Google Scholar
Baker, Terry A., Thomas J. Lopez, Austin L. Reitenga, and George W. Ruch. 2018. “The Influence of CEO and CFO Power on Accruals and Real Earnings Management.” Review of Quantitative Finance and Accounting 1–21. DOI: 10.1007/s11156-018-0711-z.Suche in Google Scholar
Sanjeev Bhojraj, Paul Hribar, Marc Picconi, and John McInnis. 2009 (9) 28. “Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts.” The Journal of Finance 64 (5): 2361–2388. DOI: 10.1111/j.1540-6261.2009.01503.x.Suche in Google Scholar
Callen, Jeffrey L., and Xiaohua Fang. 2015a. “Religion and Stock Price Crash Risk.” Journal of Financial and Quantitative Analysis 50 (1–2): 169–195. DOI: 10.1017/S0022109015000046.Suche in Google Scholar
Callen, Jeffrey L., and Xiaohua Fang. 2015b. “Short Interest and Stock Price Crash Risk.” Journal of Banking and Finance 60: 181–194. DOI: 10.1016/j.jbankfin.2015.08.009.Suche in Google Scholar
Chava, Sudheer, and Amiyatosh Purnanandam. 2010. “CEOs versus CFOs: Incentives and Corporate Policies.” Journal of Financial Economics 97 (2): 263–278. DOI: 10.1016/J.JFINECO.2010.03.018.Suche in Google Scholar
Chen, Clara Xiaoling, Lu Hai, and Theodore Sougiannis. 2012. “The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs.” Contemporary Accounting Research 29 (1): 252–282. DOI: 10.1111/j.1911-3846.2011.01094.x.Suche in Google Scholar
Chen, Joseph, Harrison Hong, and Jeremy C Stein. 2001. “Forecasting Crashes: Trading Volume, past Returns, and Conditional Skewness in Stock Prices.” Journal of Financial Economics 61 (3): 345–381. DOI: 10.1016/S0304-405X(01)00066-6.Suche in Google Scholar
Cheng, Qiang, and Terry D. Warfield. 2005. “Equity Incentives and Earnings Management.” Accounting Review 80 (2): 441–476. DOI: 10.2308/accr.2005.80.2.441.Suche in Google Scholar
Dechow, Patricia M., Richard G. Sloan, and Amy P. Sweeney. 1995. “Detecting Earnings Management.” The Accounting Review 70 (2): 193–225.Suche in Google Scholar
Denis, David J., Paul Hanouna, and Atulya Sarin. 2006. “Is There a Dark Side to Incentive Compensation?” Journal of Corporate Finance 12 (3): 467–488. DOI: 10.1016/J.JCORPFIN.2005.08.006.Suche in Google Scholar
, and Kathleen M. Eisenhardt. 1989 (1). “Agency Theory: An Assessment and Review.” Academy of Management Review 14 (1): 57–74. DOI: 10.5465/AMR.1989.4279003.Suche in Google Scholar
Erickson, Merle, Michelle Hanlon, and Edward L. Maydew. 2006. “Is There a Link between Executive Equity Incentives and Accounting Fraud?” Journal of Accounting Research 44 (1): 113–143. DOI: 10.1111/j.1475-679X.2006.00194.x.Suche in Google Scholar
Feng, Mei, Ge Weili, Shuqing Luo, and Terry Shevlin. 2011. “Why Do CFOs Become Involved in Material Accounting Manipulations?” Journal of Accounting and Economics 51 (1–2): 21–36. DOI: 10.1016/J.JACCECO.2010.09.005.Suche in Google Scholar
Fenn, George W., and Nellie Liang. 2001. “Corporate Payout Policy and Managerial Stock Incentives.” Journal of Financial Economics 60 (1): 45–72. DOI: 10.1016/S0304-405X(01)00039-3.Suche in Google Scholar
Guay, Wayne R. 1999. “The Sensitivity of CEO Wealth to Equity Risk: An Analysis of the Magnitude and Determinants.” Journal of Financial Economics 53 (1): 43–71. DOI: 10.1016/S0304-405X(99)00016-1.Suche in Google Scholar
Habib, Ahsan, Mostafa Monzur Hasan, and Haiyan Jiang. 2018. “Stock Price Crash Risk: Review of the Empirical Literature.” Accounting and Finance 58 (S1): 211–251. DOI: 10.1111/acfi.12278.Suche in Google Scholar
Harford, Jarrad, Ambrus Kecskés, and Sattar Mansi. 2018. “Do Long-Term Investors Improve Corporate Decision Making?” Journal of Corporate Finance 50: 424–452. DOI: 10.1016/j.jcorpfin.2017.09.022.Suche in Google Scholar
Hong, Harrison, Terence Lim, and Jeremy C. Stein. 2000. “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” The Journal of Finance 55 (1): 265–295. DOI: 10.1111/0022-1082.00206.Suche in Google Scholar
Hutton, Amy P., Alan J. Marcus, and Hassan Tehranian. 2009. “Opaque Financial Reports, R2, and Crash Risk.” Journal of Financial Economics 94 (1): 67–86. DOI: 10.1016/J.JFINECO.2008.10.003.Suche in Google Scholar
Jiang, John (Xuefeng), Kathy R. Petroni, and Isabel Yanyan Wang. 2010. “CFOs and CEOs: Who Have the Most Influence on Earnings Management?” Journal of Financial Economics 96 (3): 513–526. DOI: 10.1016/J.JFINECO.2010.02.007.Suche in Google Scholar
Kadan, Ohad, and Jeroen M. Swinkels. 2008. “Stocks or Options? Moral Hazard, Firm Viability, and the Design of Compensation Contracts.” Review of Financial Studies 21 (1): 451–482. DOI: 10.1093/rfs/hhm077.Suche in Google Scholar
Kim, Jeong-Bon, Zheng Wang, and Liandong Zhang. 2016. “CEO Overconfidence and Stock Price Crash Risk.” Contemporary Accounting Research 33 (4): 1720–1749. DOI: 10.1111/1911-3846.12217.Suche in Google Scholar
Kim, Jeong-Bon, Li Yinghua, and Liandong Zhang. 2011. “CFOs versus CEOs: Equity Incentives and Crashes.” Journal of Financial Economics 101 (3): 713–730. DOI: 10.1016/J.JFINECO.2011.03.013.Suche in Google Scholar
Lamoureux, Christopher G., and William D. Lastrapes. 1990. “Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects.” The Journal of Finance 45 (1): 221–229. DOI: 10.1111/j.15406261.1990.tb05088.x.Suche in Google Scholar
Linden, Mikael 2001. “A Model for Stock Return Distribution.” International Journal of Finance & Economics 6 (2): 159–169. DOI: 10.1002/ijfe.149.Suche in Google Scholar
Liu, Chunyan, Konari Uchida, and Yufeng Yang. 2012 (1). “Corporate Governance and Firm Value During the Global Financial Crisis: Evidence from China.” International Review of Financial Analysis 21: 70–80. DOI: 10.1016/J.IRFA.2011.11.002.Suche in Google Scholar
Meulbroek, Lisa K. 2001. “The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options.” Financial Management 30 (2): 5. DOI: 10.2307/3666404.Suche in Google Scholar
Shivaram Rajgopal, and Terry Shevlin. 2002 (6). “Empirical Evidence on the Relation Between Stock Option Compensation and Risk Taking.” Journal of Accounting and Economics 33 (2): 145–171. DOI: 10.1016/S0165-4101(02)00042-3.Suche in Google Scholar
Ross, Lester, and Kenneth Zhou. 2006. “New Regulations on Equity Incentives for Employees of Listed Companies.” China Law & Practice. April: 25–27.Suche in Google Scholar
Shi, Kai, and Li Nie. 2012. “Does Subprime Crisis Affect Chinese Stock Market Returns?” Journal of Applied Finance & Banking 2 (6): 163–173.10.2139/ssrn.2097739Suche in Google Scholar
Shrieves, Ronald E., and Pengjie Gao. 2002. Earnings Management and Executive Compensation: A Case of Overdose of Option and Underdose of Salary?. DOI: 10.2139/ssrn.302843.Suche in Google Scholar
Xu, Nianhang, Xuanyu Jiang, Kam C. Chan, and Zhihong Yi. 2013 (). “Analyst Coverage, Optimism, and Stock Price Crash Risk: Evidence from China.” Pacific-Basin Finance Journal 25: 217–239. DOI: 10.1016/J.PACFIN.2013.09.001.Suche in Google Scholar
© 2019 Walter de Gruyter GmbH, Berlin/Boston
Artikel in diesem Heft
- Featured Articles
- Planned Solvency III Regulation: Should It Be Adopted Outside the European Union?
- Who Estimates When It’s Not Required? the Case of Subrogation
- Dynamic Monitoring and Forecasting of the Soundness of U.S. Insurers in a Cyclical Environment
- Equity Incentives and Crash Risk in China’s A-Share Market
Artikel in diesem Heft
- Featured Articles
- Planned Solvency III Regulation: Should It Be Adopted Outside the European Union?
- Who Estimates When It’s Not Required? the Case of Subrogation
- Dynamic Monitoring and Forecasting of the Soundness of U.S. Insurers in a Cyclical Environment
- Equity Incentives and Crash Risk in China’s A-Share Market
