The effect of equity incentives to ease the agency problem has not yet been unified. There are two sets of diametrically opposed theoretical hypotheses. One supports the optimal contract theory finding that the implementation of equity incentives reduces the cost of equity agency and enhances the value of the company. The other supports the management’s turbulence effect finding that the adoption of equity incentives exacerbates agency conflicts between executives and shareholders, which increases agency costs and reduces corporate values. Based on the behavioral research ideas, the effect of equity incentives depends on the design motivation of them to a large extent. Majority shareholder controlling is a common problem in Chinese Listed Companies. The design of equity incentive contracts is easily influenced by both controlling shareholders and executives. Controlling shareholders may play an active supervisory effect and a negative interest encroachment effect in the process of realizing their control. The two types of the insider power game between controlling shareholders and the management may affect the choice of controlling shareholders’ governance effect. The different governance effect of controlling shareholders may lead to the differences in the motives for their implementation of management equity incentives. Using the case study method, and taking Shanghai Jahwa United Co., Ltd. as the research object, this paper directly observes the dynamic change of the substantive control right of the acquired company between controlling shareholders and executives, and then deeply analyzes the effect of the control right change on the heterogeneity motivation of the equity incentive contract design. We analyze the following questions: Will the governance effect of majority shareholders change with the change of control right reallocation in the process of the power game with executives? Does the change of the motivation of equity incentives following the change of the governance behavior of majority shareholders? How will the management react to this? The answers to these questions not only expand the research connotation of managerial incentive system arrangement, but also enrich the research perspective and content of the governance effect of majority shareholders. They will put optimization suggestions for the rational selection of micro-contract elements of equity incentives and the improvement of other corporate governance mechanisms. Through the theoretical analysis and the case study, we find that the motivation of the equity incentive design is influenced by the power game between executives and majority shareholders. The substantial control power held by executives will cause the welfare design of equity incentives. The power trade-off between private majority shareholders and executives can cause the incentive design of equity incentives. But when private majority shareholders get substantial control power, they will prefer to buy over executives by using equity incentives to do tunneling.
The Power Game and the Motivation of the Equity Incentive Design in the Change of Control Rights：Based on the Case Study of Shanghai Jahwa
Journal of Finance and Economics Vol. 45, Issue 08, pp. 140 - 152 (2019) DOI:10.16538/j.cnki.jfe.2019.08.010
Chen S H, Li W A. The listed companies’ stock options in China: A legitimate “redemption” tool for large Holder[J]. Business Management Journal, 2012, (3): 50-59. (In Chinese)
Chen W Q. Controlling shareholders’ involvement and equity compensation: “Supervision” or “collusion”?[J]. Business Management Journal, 2017, (1): 114-133. (In Chinese)
Dou H, Zhang H L, Lu Z F. Enterprise group, large shareholder supervision and overinvestment[J]. Managing World, 2014, (7): 134-143. (In Chinese)
Jiang F X, Huang L, Zhang M. Product market competition, corporate governance and agency costs[J]. The Journal of World Economy, 2009, (10): 46-59. (In Chinese)
Li W A, Li H J. Ownership structure, executive ownership and performance: Evidence from private listed firms in China[J]. Nankai Business Review, 2006, (5): 4-10. (In Chinese)
 Li Y X, Zeng W Q, Ma Z, et al. External governance environment, ownership and efficiency of listed companies’ investment[J]. Nankai Business Review, 2015, (1): 25-36. (In Chinese)
Quan X F, Wu S N, Wen F. Management power, private income and compensation rigging[J]. Economic Research Journal, 2010, (11): 73-87. (In Chinese)
Shao S, Zhou T, Lv C J. Property right nature and motivation of equity incentive design: Case Study of Shanghai Jiahua[J]. Accounting Research, 2014, (10): 43-50. (In Chinese)
Shen M H. Analysis on the influence of governance structure to family controlled tunneling behavior of chinese private listed companies[J]. Economic Research Journal, 2008, (6): 135 144. (In Chinese)
Su D W, Lin D P. CEO stock incentives , earnings management and corporate governance[J]. Economic Research Journal, 2010, (11): 88-100. (In Chinese)
Su D W, Xiong J C. Tunneling and CEO incentive contract[J]. Journal of Financial Research, 2013, (12): 167-180. (In Chinese)
Wang H C, Cao F, Ye K T. Monitoring or tunneling? The proportion of the proportion held by the big shareholders and the risk of the crash of the stock price[J]. Management World, 2015, (2): 45-57. (In Chinese)
Wang Y, Ye L, Sheng M Q. Management power, opportunism motivation and equity incentive plan design[J]. Accounting Research, 2012, (10): 35-41. (In Chinese)
Wu Y H, Wu S N. Executive compensation: Incentive or self-interest? Evidence from Chinese listed companies[J]. Accounting Research, 2010, (11): 40-48. (In Chinese)
Xiao S F, Shi Q, Wang T, et al. The preferences of equity incentive mode of listed companies: From the prospect of incentive objects[J]. Accounting Research, 2016, (6): 55-62. (In Chinese)
Xiao S G, Yang J. Does the executive equity incentive promote the upgrading of enterprises: Empirical evidence from chinese listed companies[J]. Nankai Business Review, 2018, (3): 66-75. (In Chinese)
Xie D R, Cui C Y, Tang X Y. The notivation to meet performance target of performance-based equity incentive plans and real earnings management[J]. Nankai Business Review, 2018, (1): 159-171. (In Chinese)
Xin Y, Lv C J. Incentive, welfare, or reward: The dilemma of stock-option-incentive plan in state-owned enterprises[J]. Accounting Research, 2012, (6): 67-75. (In Chinese)
Yan Y Z. Empirical research on external governance environment, internal governance structure and collusion[J]. Management Review, 2012, (4): 28-35. (In Chinese)
Yang H H, Pan F, Mei L Z. The research on the manipulation of option exercise date under the drive of tax saving[J]. China Soft Science, 2016, (1): 121-137. (In Chinese)
Yang H H, Wang J X, Zheng Y. Managerial equity incentives, controlling shareholder characteristics and the choice of credit contracts[J]. Journal of Finance and Economics, 2018, (1): 75-86. (In Chinese)
Yu H H, Xu L B, Chen B Z. The control right of ultimate controlling shareholder and overinvestment of free cash flow[J]. Economic Research Journal, 2010, (8): 103-114. (In Chinese)
Zhang Z T. Top management team coordination needs, compensation dispersion and firm performance: A perspective of tournament theory[J]. Nankai Business Review, 2007, (2): 4-11. (In Chinese)
Zhong H Y, Ran M, Wen S X. Government intervention, insider control and corporate investment[J]. Management World, 2010, (7): 98-108. (In Chinese)
Zhou M H, Lin B, Lin D J. Management power, internal control and corruption governance[J]. Accounting Research, 2016, (3): 56-63. (In Chinese)
Zhu T. Director’s compensation, CEO’s Compensation and Firm’s future performance: Supervision or collusion?[J]. Accounting Research, 2015, (8): 49-56. (In Chinese)
Bebchuk L A, Fried J M. Executive compensation as an agency problem[J]. Journal of Economic Perspectives, 2003, 17(3): 71-92. DOI:10.1257/089533003769204362
Burkart M, Panunzi F. Agency conflicts, ownership concentration, and legal shareholder protection[J]. Journal of Financial Intermediation, 2006, 15(1): 1-31. DOI:10.1016/j.jfi.2004.12.004
Cao J, Pan X F, Tian G. Disproportional ownership structure and pay-performance relationship: Evidence from China’s listed firms[J]. Journal of Corporate Finance, 2011, 17(3): 541-554. DOI:10.1016/j.jcorpfin.2011.02.006
Cheung Y L, Rau R, Stouraitis A. Tunneling, propping, and expropriation: Evidence from connected party transactions in Hong Kong[J]. Journal of Financial Economics, 2006, 82(2): 343-386. DOI:10.1016/j.jfineco.2004.08.012
Chourou L, Abaoub E, Saadi S. The economic determinants of CEO stock option compensation[J]. Journal of Multinational Financial Management, 2008, 18(1): 61-77. DOI:10.1016/j.mulfin.2007.05.001
Core J E, Guay W R. Stock option plans for non-executive employees[J]. Journal of Financial Economics, 2001, 61(2): 253-287. DOI:10.1016/S0304-405X(01)00062-9
Fama E F, Jensen M C. Agency problems and residual claims[J]. Journal of Law & Economic, 1983, 26(2): 327-349.
Holderness C G, Sheehan D P. The role of majority shareholders in publicly held corporations: An exploratory analysis[J]. Journal of Financial Economics, 1988, 20: 317-346. DOI:10.1016/0304-405X(88)90049-9
Irving J H, Landsman W R, Lindsey B P. The valuation differences between stock option and restricted stock grants for US firms[J]. Journal of Business Finance & Accounting, 2011, 38(3-4): 395-412.
Jensen M C, Meckling W H. Theory of the firm: Managerial behavior, agency costs and ownership structure[J]. Journal of Financial Economics, 1976, 3(4): 305-360. DOI:10.1016/0304-405X(76)90026-X
La Porta R, Lopez-de-Silanes F, Shleifer A. Corporate ownership around the world[J]. The Journal of Finance, 1999, 59(2): 471-517.
Lim E N K. The role of reference point in CEO restricted stock and its impact on R&D intensity in high-technology firms[J]. Strategic Management Journal, 2015, 36(6): 872-889. DOI:10.1002/smj.2015.36.issue-6
Shleifer A, Vishny R. A survey of corporate governance[J]. The Journal of Finance, 1997, 52(2): 737-783. DOI:10.1111/j.1540-6261.1997.tb04820.x
Cite this article
Yang Huihui, Pan Fei, Liu Yuying. The Power Game and the Motivation of the Equity Incentive Design in the Change of Control Rights：Based on the Case Study of Shanghai Jahwa[J]. Journal of Finance and Economics, 2019, 45(8): 140-152.
Previous: Can Tax Incentives for Technology Introduction Promote Independent Innovation of Enterprises?