Does Equity Incentive Work in China? -Evidence from China A Share Markets

In contrast with western countries, listed firms in China are confronted with different market conditions and institutional background for equity incentive. There are arguments whether equity incentive works in China. This paper studies listed firms in China A share market which have implemented stock incentive. We measure equity incentive by the percentage of stock incentive in total shares, and firms' performance by their ROEs. We find that equity incentive is negatively related to firms' performance in the sample. This finding indicates that, although equity incentives work in western countries, it has different impact on firms' performance in China under current market situation. The findings also provides hints to regulatory authorities for improving market conditions in China.