By examining the wealth effect of announcements of equity incentive plans by using the event study, the paper shows evidence that equity incentive plans have a significant and heterogeneous impact on the listed firms’ stock prices at different stages in the A- share market.
First, around the draft release dates of the equity incentive plans issued by board of directors, the cumulative excess returns of A shares are on average significantly positive. This abnormal return does not reverse over the next 30 trading days.
Second, different types of equity incentive plans have different price effects on the equity price. Specifically, around the release dates of the drafts of equity incentive plans, the positive market reaction of stock options is the strongest, followed by the market reaction of restricted shares, and the market reaction of stock appreciation rights is the weakest. The main reason for this is that there are significant differences in the degree of incentives for different types of equity incentives.
Third, around the announcement dates when the equity incentive plan is terminated, the market-wide investors show disperse opinions, which lead to a significant increase in the return volatility in the cross section as well as a significantly negative cumulative abnormal return.
Fourth, we also explore the potential factors that affect the termination of equity incentive schemes. We find that the governance structure, salary structure and fundamentals all affect the possibility of termination of equity incentive schemes. An increase in the proportion of independent directors can reduce the possibility of termination of equity incentive schemes. Moreover, firm fundamentals play a more important role in determining the possibility of termination of equity incentive schemes. For example, higher return of equity and higher total asset growth rate would lead to a lower possibility of plan termination.
This further confirms that announcement effects at different stages of equity incentive plans on stock price come more from investors’ expectation of the company’s fundamentals. The changes in investor expectations then echo to shareholders’ wealth effect by incorporating information into stock prices.
Fifth, the higher the proportion of equity incentives to total shares outstanding, the greater the intensity of equity incentives, and the better the ability of equity incentives to coordinate the goals of managers and the company’s long-term interests. We then document a more remarkable and positive market reaction when the proportion of equity incentives to total shares outstanding is higher in the cross section.
Finally, we find that the A-share prices are significantly lower around announcement dates of granting equity incentives, but with a rapid rise in the stock prices. We conjecture that there are timing behaviors for the selection of dates of grating incentives, which aims to expand the space of profitability.
Overall, the paper discusses the impact of equity incentive schemes on stock prices at different stages of implementation in detail. Our findings offer a deep insight into investment practice and wealth management, and also provides policy implications for improving information disclosure mechanism and protecting the interests of investors.
