Equity Incentive and Herding Investment: Evidence from Chinese Listed Companies

This paper argues that executives' equity incentive whether aggravate manager herd behavior in making investment decisions. Allowing the executives' equity incentive proxy for managers' reputation, we present that the investment deviation between the firm and industry average is a function of not only the traditional determinant of investment but also the executives' equity incentive. Moreover, focusing on the executives' equity incentive plans implemented by Chinese listed companies during 2006-2013, we test the executives' equity incentive whether aggregate herding investment, and study the moderate of equity incentive in herding investment on firm's inefficient investment. Evidence shows that: (1) as one of managers' reputation scheme, executives' equity incentive induce managers carry on herding behavior for managerial carrier concern; (2) firm's herding investment bring about investing inefficiency; moreover, (3) as a moderator of herding investment and investment inefficiency, executives' equity incentive enhance the positive effect between them. The results suggest that the executives' equity incentive works effectively in herding investment.