The Investigation on Opinion Shopping Before the Implementation of Equity Incentives

Xie Yuhui; Liu Wenjun; Shi Dejin

doi:doi:10.16538/j.cnki.jfe.2018.11.003

Summary

The provision of Measures for the Administration of Equity Incentive of Listed Companies (Trial) stipulates the listed companies that intend to implement equity incentives cannot have an audit report where there is an adverse opinion or disclaimer of opinion. This provision may induce companies preparing to implement equity incentives to engage in strategic opinion shopping. Specifically, opinion shopping can be achieved by raising audit fees, auditor changes or other means. Opinion shopping damages the independence of auditors, and it impacts the audit quality of financial statements. Therefore, this study is devoted to studying whether companies engage in strategic opinion shopping before implementing equity incentives. If that phenomenon is real, what are the characteristics of enterprises engaging in opinion shopping before the implementation of equity incentives?　　To analyze opinion shopping before the implementation of equity incentives, first, the propensity score matching method is used for selecting the corresponding control group that companies do not implement equity incentives for the experimental group that companies have the plan of implementing equity incentives. Then based on the experimental group and the selected control group data, the opinion shopping model of Lennox (2000) is adopted to analyze opinion shopping. Finally, the equity incentive related variables are added to the opinion shopping model of Lennox (2000), which forms the difference-in-differences model to analyze the opinion shopping before the implementation of equity incentives.　　The main conclusions are as following. First, the equity incentive plan has a significant inducement effect on opinion shopping before the implementation of equity incentives. Companies with equity incentive plans have obvious opinion shopping behaviors before the implementation of equity incentives to meet the provision. Second, in 1 year prior to the implementation of equity incentives, the audit quality of companies with equity incentive plans is lower, which is reflected in the reduction of the performance through the manipulation of negative accruals. Third, companies engage in partner-level opinion shopping in 1 or 2 years prior to the implementation of equity incentives, and they engage in auditor-level opinion shopping in 1 year prior to that. Fourth, in distinguishing the nature of property rights and organizational forms of audit firms, it is found that partner-level opinion shopping before the implementation of equity incentives is more significant in non-state-owned enterprises. Partner-level opinion shopping before the implementation of equity incentives can be inhibited when audit firms were formed as a partnership before 2013, but it cannot be inhibited after 2013.　　The contributions of this article are mainly reflected in the following two aspects. First, this paper shows the fact that there is opinion shopping induced by Measures for the Administration of Equity Incentive of Listed Companies (Trial). Second, this paper studies the factors that have influence on opinion shopping from the perspective of the implementation of equity incentives, which enriches the literature on stock incentives and opinion shopping.　　In view of the phenomenon of opinion shopping before the implementation of equity incentives, this study puts forward the following suggestions. First, regulatory authorities should accurately grasp the supervision time and strengthen the supervision before the implementation of equity incentives. There is generally a time lag between the publication date of equity incentive draft and the granting date, sometimes even across a fiscal year. Therefore, in order to protect the rights of investors and maintain the capital market order, regulatory authorities should strengthen supervisions on companies issuing the draft of equity incentives. Second, the detailed reasons of the partner’s change should be disclosed compulsorily. Compared with the auditor, the partner’s change is more concealed. Therefore, the companies, which have the disclosure of equity incentive draft and the change of the partner, are required to disclose the detailed reasons to facilitate regulatory supervisions.