Equity Incentives for Technical Talents in High-tech Enterprises
and Firm Performance
Name: Yi Fu
Student number: 11675578
Thesis supervisor: Alexandros Sikalidis Date: June 24, 2018
Word count: 13,600
MSc Accountancy & Control, specialization Control
Statement of Originality
This document is written by student Yi Fu who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
This thesis firstly examines the influence of equity incentives for technical talents on corporate performance in high-tech enterprises and then investigates the complementary effect of executive shareholdings, using a sample of Chinese high-tech enterprises listed on Growth Enterprise Market (GEM), which was established in 2009 and provides plat for those enterprises that are the main driving force of China's technological innovation and economic growth.
Throughout quantitative analysis, a significantly positive correlation of equity incentives and subsequent corporate performance of high-tech enterprises has been found. Besides, the empirical results also provide evidence on a positive complementary effect of executive shareholdings, indicating synergy of human resources also plays a critical role in high-tech firm’s performance. Furthermore, the findings of this paper identify implications for future studies on development of high-tech firms.
Contents
1. INTRODUCTION ... 1
1.1BACKGROUND ... 1
1.2RESEARCH QUESTION ... 1
1.3MOTIVATION AND CONTRIBUTION... 2
1.4STRUCTURE ... 3
2. LITERATURE REVIEW AND HYPOTHESIS ... 4
2.1THEORETICAL BASICS ... 4
2.1.1 Agency Theory... 4
2.1.2 Theory of Motivation ... 6
2.2EQUITY INCENTIVE ... 10
2.1.1 The definition ... 10
2.1.2 Equity incentive and principal-agent relationship ... 11
2.3HYPOTHESIS DEVELOPMENT... 13
2.3.1 Impact of equity incentives for technical talents on firm performance ... 13
2.3.2 Complementary impact of management shareholdings and firm performance ... 15
3. RESEARCH DESIGN ... 21
3.1RESEARCH SAMPLE AND DATA SOURCE ... 21
3.2DESCRIPTIVE STATISTICS ... 23
3.2.1 Proxy for equity incentive plan ... 23
3.2.2 Control Variables ... 23
3.2.3 Proxy for firm performance... 25
3.2.4 Variable description table ... 25
3.3REGRESSION MODEL ... 26
4. EMPIRICAL FINDINGS... 28
4.1.DESCRIPTIVE STATISTICS ... 28
4.2RESULTS OF HYPOTHESIS TESTS ... 31
4.2.1 Equity incentive for technical talents & firm performance ... 31
4.2.2 Complementary impact of management shareholdings and firm performance ... 32
4.3ROBUSTNESS ANALYSIS... 33
5. CONCLUSIONS ... 36
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1. INTRODUCTION
1.1 Background
Human resources have been highly competitive capital for enterprises, especially for high-tech companies compared with traditional manufacturing enterprises. Technological innovation and research development by technical talents is crucial for the development of high-tech enterprises, which is the driving force and source of growing businesses. The loss of key technologies and these talents will lead to huge financial loss for the enterprises. As means of giving stock options or restricted stocks, equity incentives are usually used to attract and retain technological professionals. In this way, equity incentives not only can ensure the stability of the enterprise, but also can motivate technological innovation and improve enterprises’ performance.
Equity incentive was originated in the 1950s in the US and quickly developed in both Europe and the US. Currently most American listed high-tech companies have implemented employee stock ownership plans to motivate staff and create firm value and operate companies for stakeholders’ interest. In China, equity incentive started in 2005 when relevant implementation regulations came out. Haier Group and Huawei Enterprise took the first lead implementing equity incentive plan in traditional manufacturing industry and new digital technology industry relatively. In addition, previous literature found that worldwide-known enterprises like Microsoft and Google indeed improve production efficiency via equity incentive plan.
1.2 Research question
This article will investigate the influence of equity incentive on non-executive level professional talents who play critical role in business operation in high-tech entities through mitigating the interest conflict via making them holding ownership of the entities, and also investigate whether the management shareholding will positively influence the relationship of the equity for technological talents and corporate performance.
High-tech enterprises refer to entities that devote large amounts of capital in research and development and professional talents in these enterprises refer to employees who master professional knowledge that can be transferred into economic benefits for entities and who are responsible for research development. Substantive firm value of
2 these firms is generated via conducting on technology-based products or services that apply advanced methods or innovative technologies. According to Anderson et al. (2000), compared with traditional firms, “new economic” firms distinguish themselves by aggressively relying on the implementation of equity grants as indispensable part of compensation schemes for executive and non-executive employees. Sesil et al. (2002) supplemented that technology enterprises use equity grants as a bigger fraction of compensation scheme, and have more tendency to implement stock option programs for employees, compared with traditional firms. Therefore, compared with traditional firms, equity incentives have superiorly prominent effect in high-tech firms, in which innovative technologies are the driving force to promote enterprise value. To be specific, for high-tech companies, the main driving force of rapid development lies in the technical research and development capabilities of core technical personnel. This feature of high-tech enterprises is advantageous in investigating the effect of equity incentives for technical talents because a stable and high-quality scientific and technological personnel team will continue to create value for enterprises.
1.3 Motivation and Contribution
Berle and Means (1932) first noticed the agency problem between management and the owner in 1930s. They proposed that to improve this situation, the most effective way is to give managers a certain amount of equity, so that the managers have residual claims and their interests will tend to be in congruence with shareholders’. However, in some new-economic industries which are unlike traditional industries, besides executive-level staff, corporate strategic development also depends on professional talents who master core technologies that will bring cash inflows to entities. Therefore, equity incentive plan can also be means of retaining and motivating these employees, which will improve financial performance of entities as a result of motivating innovation. Innovation is a source of economic growth in a firm, contended by an empirical research conducted by Kogan et al. (2017). Rajan (2012) found that with the rapid evolvement, the nature of the enterprise has undergone great changes and human resources are replacing physical capital as key assets and becoming a source of sustainable competitive advantage for a company, which is supported by both Offstein et al. (2005) and Buller and Mcevoy (2012). The company's core human capital includes core corporate management personnel, core technical personnel, and core
3 business personnel. They create most of the company's profits and value, and are the fundamental source of the company's competitive strength. Increasing competition on a global scale has increased the demand for innovation and quality improvement, which has spurred competition for core corporate human capital. In this context, in order to pool more innovative talents and improve corporate competitiveness and performance, companies are actively exploring the incentives for core human capital. It is an inevitable trend to assign more value to these employees.
Therefore, this paper aims to explore motivation role of equity incentives playing on non-executives via mitigating interest conflict and whether this form of measure can lead to positive financial firm performance of Chinese developing high-tech enterprises because Chinese stock market came to exist in 1990s and is still stably developing now. Implementing equity incentive as means of motivation is in preliminary stage among Chinese listed high-tech companies. Furthermore, I also want to examine the complementary function of management shareholdings on the association between equity incentives for core technological talents and firm performance.
The findings should be of relevance to high-tech enterprises that emphasize on the importance of human capital and provide insights that they should focus on equity incentives for core technical talents, which is of vital importance for the current innovation-driven development strategy. Additionally, this paper provides implications for these enterprises on the synergy of human resources as will be investigated by the complementary effect of executive shareholdings.
1.4 Structure
This paper is structured as follows. Section one introduces thesis background, research question and related contribution. Section two is composed of literature review and theories as well as hypothesis development. In section three, the research methodology is interpreted, including research design, sample selection, model description, and variable measurement operation procedure and robustness analysis. Section four demonstrates the findings of this study data results. Discussion and conclusion are presented in section five.
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2. LITERATURE REVIEW AND HYPOTHESIS
2.1 Theoretical basics 2.1.1 Agency Theory
The modern principal-agent theory originated from Burley and Means (1932). They pointed out that the practice of the enterprise owner that is also the operator has great drawbacks. They advocate the separation of ownership and control. Untill the late 1960s and early 1970s, some economists began to explore deep insights into the agency problems of information asymmetry in enterprises, and the agency theory was developed.
Ross proposed the principal-agent relationship in 1973 by contending that once both parties are participating, in which the proxy party makes decisions for the principal, the agency connection will follow. Jason and Macklin (1976) defined the principal-agent relationship concerning a contract in which one or more actors specify the employment of other actors to provide services for them, and pay corresponding remuneration. During the contract period, different motivations and non-related factors due to incomplete contracting theory (Grossman and Hart, 1986) may lead agents to deviate from their initial goal of firm interest maximization self-interest is dominant among all motivations. To monitor the agent behavior and problems, agency costs inevitably occur due to this contractual relationship. Jensen and Meckling (1976) accordingly summarized that interest conflict between the company owner and manager results in agency cost, which thus produces non-synergy of company’s business goal. This can be mainly attributed to two reasons. First, the principal cannot satisfy the manager with adequate incentives; Second, the supervision cost of the principal devoted on the agent might excess potential benefits. Demsetz (1985) contended two types of agency problems, moral hazard and adverse selection. The first type refers to the action taken by the agent against the interest of principal due to the difficulty of the principal supervising the agent. The second type results from remoteness, which indicates that agent obtains close and critical information that is difficult for the principal to obtain. Due to principal-agent problems, besides supervision mechanism, effective incentive mechanism must be constructed to solve agency problems. The aim of incentive mechanism is to assure the agent's actions consistent with owners’ interests. Through building a dynamic model in research, both Lundner (1981) and Robbins (1979) agreed on that if a long-term relationship with enough confidence exists between agent and
5 principal, then Pareto's first-order risk sharing incentives are achievable. Phama (1980) believed that agent’s reputation in market can be utilized by agent as a supervision tool. He explained that potential default cost and frustrated reputation will regulate agents’ behavior. Pindick and Rubinfeld (2009) concluded that proper incentive structure regarding giving rewards on effortful outcomes achieved by agents enables them to behave in congruence with owner’s interests when it’s hard to directly measure their performance outcomes.
Overall, from the development history of agency theory, separation of ownership and control results in diverse interest goals between principal and agent, leading to agency problems and corresponding cost. As studied in prior literature, constructing incentive mechanisms is an effective way to confront with this problem. In following section, two relationship models of principal-agent will be described, and how incentive mechanism can be applied in relationship models will be discussed as well.
2.1.1.1 The first type of agency relationship
In listed companies with an ownership structure of decentralized shares, executives hold the right to make business decisions, but they do not hold or hold very few shares. Therefore, they have no residual claim right on the company’s operating income, and to pursue personal maximum interests they will act in “adverse selection” increasing shareholders’ agency costs, infringe on owners’ interests and thus reduce firm’s value. This is the traditional principal-agent problem, which is the first type of principal-agent conflict. An important means to solve the agency problem is supervision. Because of the information asymmetry, the owner's supervision costs are high and cannot fundamentally mitigate the conflict, supplement with an effective incentive and constraint mechanism is particularly important. Jensen and Meckling (1976) suggests that equity incentives for management can help improve company performance. After implementing equity incentives for management, the internal structure of the first principal-agent relationship will change.
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2.1.1.2 The second type of agency relationship
Under the decentralized ownership, shareholders are homogenous, and there is no obvious ability to infringe on each other. However, under the concentrated ownership, there are distinct differences among large shareholders and small and medium-sized shareholders. In most cases, large shareholders use their control rights to seek personal interests at the expense of small and medium-sized shareholders’ interests, It can be seen that there exists the second type of agency cost between small and medium shareholders and controlling shareholders or major shareholders in modern enterprises.
2.1.2 Theory of Motivation
The theory of motivation concerns with the process, based on people's needs, to inspire people to work with enthusiasm and initiative by satisfying people's various needs through various methods, and carry out creative activities to achieve the organization's expected goals. The ultimate aim of motivation process is to improve overall effectiveness of the organization.
Shareholders Management
First type of agency cost Decentralized shares Controlling Shareholders Other Shareholders Management
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2.1.2.1 Maslow’s hierarchy of needs
Maslow, an American psychologist, came up with a hierarchy of needs theory in A Theory of Human Motivation (1943). Maslow believes that everyone has his or her own complex needs and these needs can be arranged in a pyramid shape with the largest, most fundamental needs at the bottom and the need for actualization and self-transcendence at the top. He sums up the various needs of human beings into five levels: esteem, social, security, physical needs, self-actualization. Physical needs refer to the most basic needs of human survival, including clothing, food, shelter; Security needs are the need for humans to protect themselves from harm, including life safety and psychological security; Social needs refer to acceptance of love and friendship, and work is trusted. There is a sense of belonging, etc.; Esteem needs to include both esteem and the need to be respected by others. There must be confidence, self-esteem, and their own achievements must be recognized and respected by others; Self-actualization needs refer to personal growth and future development, which can fulfill their potential and meet the needs of established goals.
Maslow emphasized that when a low-level need is met, another higher-level need will occupy a dominant position, and with the improvement of living standards, people's needs will continue to increase. Among these needs, physical needs and safety needs are at a lower level, and can be met through economic indicators such as bonus benefits. Social needs, respect needs, and self-actualization needs are higher-level needs and can only be achieved through incentive measures.
Companies hope to maximize working ability of the employees it employs, and therefore meeting the higher need level of employees is more important to the company's growth. To incentivize staff, the management must first know individual needs of each employee about which level has been reached, so as to focus on this level and the needs of higher levels, and then take more efficient management measures; in addition, companies are supposed to fully meet the needs of employees’ higher needs so that employees feel belonged, which will retain large numbers of long-staying and high-value employees.
For high-tech enterprises, their incentive targets are senior management personnel and core technical personnel. The incentive demand of these employees has reached a higher level. Compared with traditional compensation such as bonuses and benefits, equity incentives are more in line with the needs of scientific and technological talents
8 and can produce greater incentive effects as a result of establishing a long-term mutually beneficial relationship.
2.1.2.2 Herzberg’s Two-Factor Theory
The American psychologist Hertzberg proposed the two-factor theory in the late 1950s. Study of Herzberg et al. (1959) and Herzberg and Frederick (1966) introduced “Two-factor”, referring to “motivation factors” and “Hygiene factors” respectively. He found that the job satisfaction of some employees is related to the internal factors, and the dissatisfaction of the employees' work is related to some external factors. The factors that lead to job satisfaction are significantly different from those that lead to job unsatisfactory. External factors that lead to job unsatisfactory are called “Hygiene factors”. Internal factors that effectively incentivize the staff are defined as “motivation factors”. He also proposed that the content of “Motivation factors” refers to the factors that can promote employees to have job satisfaction, such as recognition, job challenges, sense of responsibility, promotion, sense of accomplishment, and opportunities for development. “Motivation factors” are more related to the work itself. In contrast, “Hygiene factors” represent factors that are related to the external environment of the job, e.g. company’s conduct and regulations, the relationship with supervisors and managers, working conditions, remuneration packages, relationships with colleagues, personal lives, and relationships with subordinates, etc. The improvement of “Hygiene factors” cannot satisfy employees. They can only comfort employees to a certain extent, and cannot motivate employees. Only internal factors can increase employee satisfaction. Therefore, if companies want to make employees feel satisfied and full of passion, they should focus on improving “motivation factors” in the context of ensuring “Hygiene factors”.
George (1973) verified two-factor motivation theory through conducting a research on rating job factors and job satisfaction from a group of firms in New Zealand. The results of his study are consistent with Herzberg’s original findings that intrinsic motivation of employees are highly correlated with job satisfaction.
Equity incentives can satisfy the employees' sense of belonging, achievement, and responsibility. They can link employees with the interests of the company, and connect the employees’ efforts with firm’s performance. In this way, equity incentives can strengthen employees’ intrinsic sense of satisfaction and belonging and standardize the
9 behavior of employees so as to achieve the company's expected goals and contribute to better performance.
2.1.2.3 Adam’s Equity Theory
J. Stacy Adams, the American behavioral psychologist, proposed the theory of equity in the 1960s. Through research, he found that employees valued whether they were treated fairly and reasonably. Specifically, Employees usually calculate the ratio of their contributions and benefits they get from results, and then compare this ratio with other employees in the company. If employees feel that their ratio is not different from others’, they will feel that they are in a fair state. If the ratio is different from others’, they will think that the benefits are too low or too high, which will produce a sense of injustice (Adam, 1963).
Different from Maslow’s and Herzberg’s theory, Equity theory emphasizes the fairness of resources allocation among relational individuals. Employees usually assess fairness through both horizontal and vertical comparisons. In horizontal comparison, employees will compare their rewards with those of other individuals, which refer to people at the same position and under same working condition in the company, and also refer to friends and fellow employees. Vertical comparison refers to that employees will also compare their current rewards with their past rewards and behave correspondingly. When employees feel fair, their enthusiasm and efforts may remain same as previous. Research showed that in a business setting, if employees feel unfair, they will make efforts to mitigate inequities and try to correct the gap. The sense of unfairness will exert a negative impact on their enthusiasm in work, resulting in increased absenteeism and even leave-off (Carrell and Dittrich, 1978). Accordingly, the organizational production efficiency will decline and product quality may decline as well. Additionally, empirical findings of Spector (2008) reported that underpayment and overpayment result in different perceptions of employees, inequity and equity respectively. Employees expect corresponding payment equity with their performance. If they feel unfair on the payment, they will not work as hard as before. In most cases, employees’ feeling of unfairness will create a mental imbalance that is not beneficial to the development of the company and employees. At this time, managers need to find out the psychological status of their employees, communicate with them, and guide
10 employees to the correct mental path. If there exists unfairness, the company should consider constructing a fair motivation mechanism dealing with this issue.
Equity incentives links the contributions of employees with the performance of the company. If employees contribute more, the more rewards the corresponding employees receive as the return is determined based on the degree of efforts of employees. Specifically, the more efforts technical talents devote to, the higher rewards they will receive from their granted shares.
2.2 Equity Incentive 2.1.1 The definition
Equity incentive, alternatively known as employee stock ownership plan (ESOP), refers to a program providing employees with ownership right to obtain economic benefits, participate in the company’s management and bare certain responsibility arising from owning shares of the company. Equity is a property right tied with property rights, bonds, intellectual property, etc.
ESOP was originated in the United States by Louis Kelso, who invented ESOP allowing employees to become company’s owner as a succession scheme (“Louis O. Kelso, Who Advocated Worker-Capitalism, Is Dead at 77.” New York Times. 21 February 1991.). Afterwards, ESOPs were widely advocated by Republican leaders as a component of their retirement plan. In 1958, Kelso proposed a new concept of Consumer Stock Ownership Plan. Kelso and Alder (1975) extended concepts of for “capitalist democracy”. They came up with various ways of broadening the range of equity owners, e.g. a framework allowing average employees to borrow loans from the as investment capital. Subsequently, Ronald (1977) discussed and provided insights on a conversion of ESOP from current pension plan to employee stock bonus plan.
The advantages of ESOP as equity incentives are examined and advocated by a number of scholars. Empirical research of Chris (1995) found that employee ownership (in the form of ESOP and individual shareholding) has prominently positive effect on organizational productivity. Blais (2010) investigated US multinational companies and analysis showed that shared capitalism was widely implemented in US economy. Though surveying employees in these companies, they concluded that shared capitalism constructed a mutual linkage between company and employees, and promoted organizational production and profits because employees expressed a willingness to stay and devote more efforts. Accordingly, from argumentation above,
11 ESOPs change employees' identity from workers to owners to some extent, and increase employees' sense of satisfaction and belonging. Combining their interests with corporate interests, employees will resist some bad behaviors that harm corporate interests, therefore the organizational productivity and profits will be improved. In addition, the signing of ESOPs between employees and the company can lead to long-term cooperation and development between the employees and the company, which will promote company’s long-term strategic development. Furthermore, ESOPs attract and retain employees for the company. Besides fixed salary given to employees, employee ownership provides undefined and unpredictable benefits depending on employees’ effortful devotion; Fourth, equity incentives can reduce spot (immediate) costs. Sometimes there is a shortage of cash flow, and equity incentives can replace part of the fixed salary to achieve a mutually beneficial correlation between employees and the company. Employee stock ownership compensation mainly incorporate: stock options, restricted stock, stock appreciation rights, phantom stock, and employee stock purchase plans.
2.1.2 Equity incentive and principal-agent relationship
Equity incentives, as a vital aspect of corporate governance quality, are widely considered to have incentive and restraint functions. As long-term incentive mechanism, equity incentives can strengthen the mutual interests and synergies between shareholders and the operator through sharing benefits and risk, reducing agency costs and improving company performance.
Most scholars agree that equity incentives can be used as an effective mechanism to deal with the first type of principal-agent relationship. Jensen and Murphy (1990) pointed out that the implementation of equity incentive plan will make the interests of operators in consistence with interests of owners. In this way, agency costs can be more effectively reduced. The analysis from Hanson and Song (2000) shows that the granting of equity to the management can reduce the company’s cash pressure and agency costs, which will help promote firm’s value. In addition, Morck et al. (1988) and Hanlon et al. (2003) found that the executive shareholding encourages managers to pay attention to long-term interests and focus on firm’s long-term value. As a result, through the mediating effect on the first type of agency costs, equity incentives can have a positive influence on corporate performance. Davidson and Singh (2003) supported this claim through their findings that the high holding of shares allows the management of the
12 company to reach an agreement with shareholders regarding interests, and the agency costs will decrease while the proportion of the shareholdings of the managers increase. The higher the ratio of managers’ shareholdings, the more consistent the interests of managers with interests of shareholders. Tzioumis (2008) selected listed companies of the United States to investigate and found that the first type of agency costs has been significantly reduced after implementing the equity incentive plan.
Besides investigating the direct impact of equity incentives for management on corporate performance, some scholars have studied indirect paths, through which equity incentives play a positive role. The study of Wu and Tu (2007) found that when companies have sufficient resources or perform well, the positive correlation between executive equity incentives and corporate R&D investment is even more significant. The research work of Kouki and Guizani (2009) suggested that CEO's stock option holding level is negatively associated with dividend payouts. The higher shareholding ratio of executives, the greater the tendency for companies to set aside surpluses and reduce dividend payouts. Additionally, Armstrong et al. (2010) concluded that there is no positive correlation between equity incentives and corporate accounting irregularities. On the contrary, the higher level of equity incentives granted to executives, the lower the frequency of accounting irregularities. Xue (2007) used the sample of high-tech companies in the US to study the relationship of executive incentives and corporate innovation. They found that the more equity-based incentives executives have, the more they devoted to take actions to develop new technologies within the company.
The second type of agency problems exists between small and medium shareholders and the controlling shareholders. The controlling shareholders use their control right to plunder the interests from the small and medium shareholders through the “conveyance of benefits” Huang et al. (2013). Once the equity incentive is introduced, the manager becomes a member of the small and medium shareholders, and their identity is transformed into the principal of the controlling shareholder. After the implementation of equity incentives, the managers who are small and medium shareholders’ agent have become an important factor in counteracting the conflict between controlling shareholders and medium and small shareholders.
Analysis given above provides basics for both Hypothesis 1 and Hypothesis 2. In high-tech enterprises, professional talents contribute greatly to the company's key and core technologies. As a result, the agency risks exist and enterprises are more vulnerable to
13 losses because of technical talents’ agent identity. Besides contract compensation, implementing equity incentives as a long-term contract for technological talents turns them into owners of the enterprise and motivate them to work harder and contribute more to firm’s intellectual properties.
As the case with the management, implementing equity incentives not only mitigate interest conflict in the first type of agent-principal relationship, but also transfer their identity to small shareholders and this will inhibit their joint with controlling shareholders to attack interests of medium and small shareholders. The benefits brought by equity incentives for management will be reflected in indirect paths, e.g. investment, earning’s management and innovation, which are highly correlated with firm’s development and performance.
2.3 Hypothesis Development
2.3.1 Impact of equity incentives for technical talents on firm performance
Equity incentives granted to non-executives have become an alternative form of employee compensation in recent years. However, prior studies mostly focused on the firm performance influenced by equity incentives for executives, e.g. Han and Suk (1998) found a positive association between stock returns as the performance indicator and the ratio of the shareholding by the management. Study of Hanson and Song (2000) concluded that the granting of equity to the management can reduce the company’s cash pressure and agency costs, which will help increase firm’s value.
Fewer studies with mixed views relatively focus on the effects of equity incentives for professionals, compared to studies on equity incentives for executives. In regard to studies concerning with the implementation of equity incentive plans in Chinese listed companies, domestic researches on equity incentives for scientific and technological talents mainly focus on the proportion of technical talents’ shareholdings, the constraint mechanism of scientific and technological talents, and the analysis of barriers to implement equity incentives for technology talents. As for studies on the proportion of shareholdings of professional talents, Yin (1999) illustrates three types of taking stock-shares with technology. The first type is to take the stock that share the ownership of the firm without paying cash or other tangible assets, the second type is to buy the stock by lending from other shareholders and only the lending amount of money that have paid back become ownership shares, and the third type is dividend-payback shares that only have right to claim dividends. The findings of Yin showed that most entrepreneurs
14 are willing to hold the stock option and restricted stock. The investigation of Guo (2000) shows that for high-tech companies, there is a relationship between the shareholding ratio of R&D personnel who play a supporting role in an enterprise and the company's scientific research achievements and corporate value, but the relationship is not a continuous positive correlation, which means that increasing the proportion of professional talents holding shares cannot significantly increase the incentive effect. Yang (2012) who took a sample of high-tech companies that are top 500 companies in Shanghai has conclusion in congruence. He examined the relationship between corporate innovation capabilities and long-term growth and discovered that innovation capabilities significantly impact the corporation’s long-term growth. However, Hamid (2001) has found that the motivation role of equity incentives for technological talents is less effective than supervision. He believed that a good incentive structure can well encourage technical personnel to work hard. While the enterprise is maximizing innovative capabilities of technical staff, the company’s share price is also growing. Besides the importance of innovation that professional talents contribute to enterprises, they also bring “synergy effect” and complementarity for better firm performance. Synergy refers to the interaction of two or more agents or forces makes the combined effect greater than the sum of the effects of their respective efforts. Complementarity has such an attribute, stated in Brynjolfsson and Milgrom (2013). Teece (1986) thought that complementarity refers to how one resource affects another, and how their relationships affect corporate competitiveness or corporate performance. Black and Boal (1994) found that complementary resources work together to a play greater role than each can play. Or say that one resource enlarges the influence of another resource. Wade and Hulland (2004) discussed the complementarity of resources, possible regulatory factors, and the application of resource complementarity in the research of information systems. Benjamin and Levinson (1993) believe that company performance depends on how information systems and the organization, technology, and corporate resources are integrated.Empirical research in Powell and Dent-Micallef (1997) shows that complementarity between information technologies and human resources leads to better corporate performance. Liu et al. (2013) compared the impact of core IT staff and general IT staff on corporate performance. They found that core IT staff increased corporate value while general IT staff did not increase corporate value. Further research found that the impact of core IT staff depends on the investment in non-IT resources. That is to say, they not only confirmed the importance of core human
15 capital but also proved the importance of resource complementarity. Crocker and Eckardt (2013) used a hierarchical linear model to analyze the function of multi-level human resources and found that how individual human resources perform depends on complementary functional resources and management-level resources.
Concerning with the importance of innovation to corporate performance and the importance of innovation to professional talents, combining with previous theoretical arguments lead to the following hypothesis:
H1: For high-tech enterprises, firms that have equity incentives for core technological talents perform better than those without equity incentive plans.
2.3.2 Complementary impact of management shareholdings and firm performance
Prior studies mostly focus on the direct effect of management shareholdings and these studies have diverse conclusions. There are two divorced contended effects of management shareholdings — The Convergence of Interest Effect and The Entrenchment Effect. Jensen and Meckling (1976) pointed out that as management's ownership rises, costs that deviate from frim value maximization will decrease. In other words, management's shareholding helps to reduce agency costs and improve corporate performance, and this is The Convergence of Interest Effect. The Entrenchment Effect come up by Stuarts (1988) contended that When managers’ shareholding ratio increases, the management will pursue the maximum personal interests by exploiting external investors, which will reduce the value of the company. The two deviating hypotheses results from the contradictory agency theory, which determines the effectiveness of the management’s incentive. Therefore, the conclusions reached by researchers on this theoretical study are also significantly different. There are three main directions of conclusions in this study field: equity incentives for the management have a positive effect on the firm performance; equity incentives for the management have a negative effect on the firm performance; equity incentives have no linear correlation based on both hypotheses.
As for positive effects due to the Convergence of Interest Effect, Berle and Means (1932) first studied the influence brought by equity incentive on the frim performance. They found an interest conflict between managers without shareholding and firm’s shareholders. These managers can’t pursue the maximization of firm profits. While the
16 executives’ shareholdings increase, their interests come to be congruent with shareholders’ interests and they will act towards best interest of the company. John and Wayne (2001) conducted a research and suggested that companies will take equity incentive plans into consideration at first to address the shortage in fund and other financial constraints. Through an analysis of the determinants of holding, granting and exercising stock options, the results also remain consistent with equity incentives’ purpose of attracting, retaining and motivating employees to promote firm value. Han and Suk (1998) found a positive relationship between the stock returns as the performance indicator and the ratio of the shareholding by the management. In addition, Hanson and Song (2000) concluded that the granting of equity to the management can reduce the company’s cash pressure and agency costs, which will help increase the value of the company. Qiu and Xu (2003) selected the annual earnings per share of Chinese listed companies with different management shareholding structures between 1999 and 2001, and found that companies with a high proportion shareholding by the management have more earnings per share than those companies with the management holding a low proportion shares, which proved that the proportion of executives holding high stocks has a positive effect on firm’s financial performance. Other advocates analyzed that companies can implement equity incentives as supplement of fixed compensation and in this way, employees will have a strong sense of ownership. E.g. John Doerr, a partner of venture capital firm Kleiner, Perkins, Caufield, and Byers, noted in 2004, “If the Financial Accounting Standards Board is allowed to mandate
expensing of broad-based options, they’re going to basically go away for 14 million Americans who use them...whose companies use them as a way to create a powerful ownership incentive.”
As for negative effects due to the Entrenchment Effect, Fama and Jensen (1983) believed that the proportion of management shareholding can’t be too high because the continuous increase in ownership will weaken the effect of equity restrictions and will lead managers to deviate from shareholders' goals. Demsetz (1985) researched the practical sample and found that the higher proportion of shareholding the management holds, the lower firm value will be. Study of Bebchuk (2003) et al. showed that the management will take rent-seeking actions and equity-based incentives cannot effectively solve the problem of the rent-seeking behavior of the management. Instead, equity incentives will exacerbate agency conflicts. Li (2000)’s research found that equity incentives did not play a corresponding effective role as a result of the low level
17 of shareholdings of the executives in some Chinese listed companies. Furthermore, by studying the return on net assets of the 56 sample listed companies in China after implementation of equity incentives, Gu and Zhou (2007) hold a view that the positive effects of equity incentives have not yet been exerted. Other skeptical beliefs of Core and Guay (2001) and Oyer & Schaefer (2005) argued that free-riding problem will counterpart the incentive effect on employees. Specifically, collective organizational performance measurement may result in less individual efforts, which violates with original purpose of equity incentive plan aiming to make interests of both organization and individuals in congruence.
As for the no linear correlation between equity incentives and the firm performance, Mork.et.al (1988) studied independent variables and dependent variables regarding equity incentives and firm value respectively, and concluded a relationship between equity incentives and firm value: when the management shareholding level falls 0 to 5%, there exists a positive effect; when the shareholding proportion is within [5%,25] district, there exists a negative effect; when the proportion is greater than 25%, equity incentives have positive effects but the closeness of the relationship gradually decreases. Akimova and Schwodiauer (2004) researched 202 Ukrainian large companies, selected data from 1998 to 2000, and found that the relationship between the internal shareholding ratio and the company's performance is non-linear. After the certain ratio of the shareholding, the relationship between the internal shareholding proportion and frim performance will change from the positive correlation to the negatively relationship.
Apart from three main conclusions from studies above, there also exists some researches contending that there is no relationship between equity incentives and the firm performance. Jensen and Murphy (1990) found that the implementation of equity incentives for managers have little effect on the wealth of shareholders implemented equity incentives for managers and therefore contended that the relationship between equity incentives and the firm value is weak. Lorderer and Martin (1997) conducted research on 867 companies and found that the proportion of management holdings increasing has no effect on the firm’s financial performance. Himmetberg and Palia (1999) found that there is no significant statistical correlation between the proportion of company executives’ holding shares and their operating performance.
From studies of different periods above, most of researchers in early times believe that equity incentives can effectively motivate managers to create more value for the
18 company; later studies have found that equity incentives have a negative or uncertain relationship to resolve agent conflicts and improve corporate performance. The reason why the study conclusions of China's equity incentives have not been agreed is that an important reason is that the majority of Chinese companies have large shareholder control issues. The situation of control rights held by major shareholder is seriously detrimental to the implementation of equity incentives for the management.
From argumentation above, a large amount of prior literature tested the direct relationship of the equity incentive for executives and firm performance but didn’t show through which path the executives, in other words- through which indirect way, executive shareholdings can influence the firm performance. Based on hypothesis 1 and through the analysis the first type of the principle-agent relationship, the management plays an indirect and crucial role in the firm’s operation because they decide business decisions on behalf of the firm’s stakeholders and they support business activities across the organization. Executives support research and development by coordinating various resources and they are crucial to R&D results. High-tech companies have strong growth and rapid environmental changes and require higher executives' decision-making capabilities. Little (1985) mentioned: “Our research in innovative companies shows that the management's coordination and decision making on innovation is critical.” Yang (2012) also mentioned that the management should strengthen support for innovation and corporate culture construction, and foster innovation. In the study of information systems, both Army and Sambamurthy (1999) and Ross et al. (1996) illustrated that the ability of the executive team to promote and support information systems can increase the impact of information system resources on firm performance. As a result, I believe that executive incentives and incentives for core technical talents are complementary. When lacking support from executives for R&D, the impact of R&D on company performance will diminish. On the contrary, executives’ strong support for R&D benefits the relationship between R&D and corporate performance. Lazonick (2010) proposes that innovative high-tech enterprises need three conditions: strategic control, organizational integration and capital investment. Strategic control requires that executives make strategic decisions and determine which resources need to be allocated to the innovation process in the face of a series of uncertainties in the innovation process. This requires capabilities and motivation of decision makers. Therefore, the compensation system for managing innovation is the basis for innovation.
19 Wang and Qing (2007) discussed equity incentives for core technology talents under asymmetric information conditions. They believe that, under the condition of information asymmetry, the task of the manager is to formulate a scientific incentive plan to implement effective incentives and constraints for employees so as to maximize the management effectiveness. They also put forward proposals for the governance for core technology talents.
Empirical researches also show that executive incentives are crucial for corporate innovation. Xue (2007) used the sample of high-tech companies in the United States to study the relationship between executive incentives and corporate innovation. They found that the more equity-based incentives executives have, the more they are motivated to take actions to develop new technologies within the company. Xia and Tang (2008) took a sample of high-tech Chinese listed companies that disclosed R&D expenditures from 2005 to 2006, and studied the relationship between executive equity incentives and R&D spending. The results show that executive equity incentives and R&D expenditures are significantly positively related. The more the equity incentives for executives, the more R&D expenditures will be. Liu (2007) studies 454 Chinese listed companies that disclosed R&D expenditures from 2001 to 2004 and found that executives holding shares have a stronger incentive to increase R&D expenditures. Moreover, the executives in high-tech companies have more significant impact on R&D expenditures than non-high-tech companies. Feng and Wen (2008) used relevant data from 343 listed companies from 2005 to 2007 in China and found that there is a positive correlation between managers’ shareholdings and corporate technological innovations. However, they did not find this relationship statistically significant. Li and Song (2010) used World Bank’s survey data on 1483 manufacturing enterprises in 18 cities in China to investigate the influence of management shareholding incentives on the company's innovation input and output under different ownership structures. They found that CEO's compensation incentives can stimulate firm’s innovative capabilities.
Fong's (2010) research shows that executive incentives can affect managers’ behaviors, especially those related to innovation, such as innovation spending. Using the number of patents as an innovative proxy variable, Bulan and Sanyal (2011) found that equity incentives for the management are positively correlated with the number of patent applications. Lin et al. (2011) used manufacturing data from the private sector in China and found that companies with executive incentives invest more in innovation and have
20 better innovation performance. To conclude findings above, the implementation of equity incentives to the management will motivate them to support technical research development activities and investments, which are critical in high-tech enterprises. Here I propose the following hypothesis:
H2: Shareholdings of the management have a positive influence on the relationship between equity incentives for technological talents and firm performance.
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3. RESEARCH DESIGN
3.1 Research Sample and data source
The ChiNext Market or Growth Enterprise Market (GEM) is a market set up to meet the needs of innovation companies and other growth-oriented enterprises. It has assembled a number of technology-based small and medium-sized enterprises that mainly engage in the research, development, production and service of high-tech products but at present cannot be listed in the Main-Board Market. However, these enterprises are the main driving force of China's technological innovation and economic growth. Statistics of the Shenzhen Stock Exchange show that since the establishment of the GEM in 2009, until December 31, 2016, the GEM have had a total of 570 listed companies, with a total share capital of 2.6 billion shares, and a total market value of 5.2 trillion RMB. OF the 570 listed companies on the GEM, 93% are national high-tech enterprises and 463 have the core patented technology (Yang et al., 2017). Most of China's GEM companies rely heavily on human capital as the main competitiveness, and how to incentivize core employees to play their innovative role is undoubtedly a problem that GEM companies need to seriously consider. Therefore, this paper will adopt quantitative research method based on high-tech enterprises listed in Chinese Growth Enterprise Market (GEM) as research sample to examine the relationship between core employee incentives and company performance, and the complementary effect of executive shareholdings. Since the GEM came to be for listed companies in 2009, and there were no samples of equity incentives for science and technology personnel in 2009 and 2010, I will use the sample data from 2011 to 2016. I removed four observations of companies in mergers and acquisitions, and three observations from companies in the withdrawal phase of the 2309 observations, and subsequently obtained 2302 observations. Since this article uses growth rate data (corporate sale growth) in regression model, I removed the 78 newly-listed companies in 2016 and finally obtained 2224 observations of unbalanced panel data.
Data is collected from two databases. The data of equity incentive plans, corporate governance and corporate characteristics are from GTA CSMAR database, which is a leading global provider of China financial market data, China industries and economic data, covering all companies listed on the Shanghai Stock Exchange Market and the Shenzhen Stock Exchange Market. The executive shareholding and compensation data are from Wind database, which provides macroeconomic and industry time series with
22 powerful graphics and data analysis tools. ROA and Tobin's Q are calculated based on the relevant financial indicators from CSMAR database. To prevent the influence of extreme values, I performed winsorization for values below 1% and above 99% points for all consecutive variables. Sample distribution is showed in Table 1 and the subjective of equity incentive plan is showed in Table 2.
An important aspect of my research design is that to test hypothesis 1, I do not focus on the shares of equity incentive plans and how they are priced. Instead, I focus on the question how whether these incentive plans have an effect on the subsequent performance of the firm so I used the dummy variable for the equity incentive plan. Table 1 and Table 2 present sample distribution and observations from 2011 to 2016. It can be observed that a total of 185 companies implemented equity incentives for core technical personnel, involving 421 observations, of which 154 were stock options, 210 were restricted stocks, 3 were appreciation rights and 54 were combination of two types of equity incentive. The proportion of all incentives was 36.58%, 49.88%, 0.71% and 12.83% respectively as presented in Table 2. It also shows that the proportion of the observations granting equity incentive to core technology employees accounts for only 20% of the entire observations. Accordingly, listed companies in Chinese Growth Enterprise Market (GEM) still have a lot of room for improvement in implementing equity incentive plans for core technology employees.
Table 1. Distribution period of the sample
2011 2012 2013 2014 2015 2016 Total
Equity incentive plan for technical talents 58 71 61 67 76 88 421 No incentive plan for technical talents 213 272 268 303 376 371 1803
Total 271 343 329 370 452 459 2224
Table 2. Type of equity incentive observations (2011-2016)
Stock Option Restricted Stock Appreciation
Rights Mix Total
Observations 154 210 3 54 421
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3.2 Descriptive statistics
3.2.1 Proxy for equity incentive plan
3.2.1.1 Equity incentive for technological talents
To test hypothesis 1, the equity incentive for technological talents is measured as a dummy variable. I use whether the core technicians have equity incentives (mainly restrictive stock and option incentives) as incentive measures for the core technical talents. In each period, if the firm has equity incentive for technical talents, the incentive plan=1, otherwise 0.
According to the Measures for the Management of Equity Incentives for Listed
Companies promulgated by the China Securities Regulatory Commission in 2016,
equity incentives refer to the long-term incentives for listed companies to grant the shares of the company to their directors, senior managers and other employees. When a listed company implements equity incentives with restricted stocks or stock options, this regulation shall apply; This regulation proposes that restricted stocks refer to the stocks of the company that the incentive object is restricted to exercise certain rights like transfer unless some conditions stipulated in the equity incentive plan are met. Only after the achievement of the intended target can the incentive target sell off and benefit from the restricted stocks. Stock options refer to the right granted by listed companies to grant incentive objects to purchase a certain amount of shares of the company within a certain period of time in the future with pre-determined conditions.
The equity incentive plans investigated from the sample in this article mainly focus on restricted stocks and stock options.
3.2.1.2 Equity incentive for the management
To test Hypothesis 2, I will measure equity incentive for the management as the ratio of the management’s shareholdings divided by total shares. The complementary effect of executive shareholding will be verified by constructing a cross variable, multiplying dummy variable of technical talents’ equity incentives and executive shareholding ratio.
3.2.2 Control Variables
Considering the influence of other factors on firm performance and referring to Anderson and Reeb (2003), Core et al. (1999), Wu and Tang (2016), I include seven control variables to analyze the regression model.
24 Control variables are divided into two types, industry characteristics and corporate characteristics. Corporate characteristics compromise of ownership structure, compensation for executives, the size of the company, company growth, age, the scale of the company, company’s controller and leverage ratio.
Zeckhauser (1990) pointed out in his research that the supervision role of large shareholders avoids the problem of information asymmetry between management and owners to a certain extent. This further makes it difficult to implement self-interested behaviors such as management’s earnings smoothing methods, and thus enhances results of implementing equity incentives. Taking the effect of share concentration into account, I measure the ownership concentration in the company as Top 1, which refers to the shareholding ratio of the largest shareholder. Compensation contracts have been proved to be a practical approach to reduce agency costs and increase executive efficiency (Murphy, 1986), indicating that executive compensation is correlated with the firm performance through restricting executives’ behavior. The variable of executive compensation is defined by the natural logarithm of firm’s annual compensation for top three executives. Firm size will be measured as Lnasset, which is the logarithm of the company’s total assets. While small businesses have more controls on strategy and operating activities, firms with larger size are generally considered to possess more cash holdings and investment opportunities, which results in high possibility of expansion of investment scale and over-investment. As for firm growth, I will use year-on-year growth rate of operating income because operating income represents an accounting figure which records the amount of profit realized from operating activities. In general, most firms obtain income and create value through sales of products and services, so the growth of operating income can effectively reflect the expansion of sales, as well as the growth of firm. Leverage ratio refers to debt to asset ratio in the regression model. The impact of leverage level on firm performance is mainly due to information asymmetry between corporate creditors and shareholders, and consequent adverse selection and moral hazard. Since corporate creditors have right of recourse towards residual interest related with management decision making, the monitoring effect brought by these creditors will to some extent bind managers’ behavior, which ultimately influences firm performance to a degree. The age of the company is defined from the founding time to the end of 2016. The research of Evans (1987) on firm dynamics provided evidence that with the increase of firm age and size, firm growth, as manifested in investment scale, will decline. Regarding firm’s
25 controller, Sun and Tong (2003) studied the changes in the performance of 634 state-owned enterprises that had been privatized through listing and restructuring from 1994 to 1998. Through comparison, they found that after isolating control of the State, the profitability, sales revenue, and productivity of the company have been improved. Accordingly, they concluded that private-owned holdings are beneficial to improve company performance while state-owned holdings will reduce company performance. Therefore, I will use dummy variable to define the controller and determine value as 1 if the company is controlled by State otherwise 0. Industry characteristics refer to different industry indicators, which I will control as industry dummy variables.
3.2.3 Proxy for firm performance
Referring to Anderson and Reeb (2003) and Sesil et al. (2002), I investigate ROA and Tobin's Q (Tobinq) of sample firms from their 2011-2016 annual reports, and compare the firm performance between corporations that implement equity incentive in the same year and those that have no equity incentive plan.
ROA is calculated as net profit divided by average annual total assets, while Tobinq is calculated as the market value of the assets divided by the book value of the assets. The market value of assets is the total share capital of shares multiplies the annual closing share price and then plus liabilities. The market value of assets is the total share capital of A shares times the annual closing price plus liabilities. The book value of assets is calculated as total assets at the end of the year.
3.2.4 Variable description table
Table 3 Variable description
Category Variable Variable Abbreviation Variable Interpretation
Dependent Variable
Firm Performance ROA ROA=Net profit/ Average annual assets
Firm Performance Tobinq Tobinq=Market Value of assets/Book value of assets Independent
Variable
Whether the company
has equity incentive Techinct
Techinct=1 if having equity incentive plan in current year otherwise 0
26 plan for technical
talents in current year Executive shareholding
ratio in current year Mngersh
Mngersh=shareholding of executives / total shares
Control Variable
Ownership
concentration Top 1
Shareholding of the largest shareholder
Leverage ratio Leverage
Leverage ratio=current year’s total liability / current year’s total asset
Executive compensation Compen
Natural logarithm of top three executives' compensation
Firm growth
opportunity Growth
(Current year’s operating income - Last year’s operating income) / Current year’s operating income
Incorporation years Age
From the establishment year of the company to 2016
Firm controller State
State=1 if the company is controlled by State otherwise 0
Company’s scale Size Natural logarithm of total assets
Industry dummy Variable
∑DINDUSTRY 45 industry groups with 44 industry dummy variables
Year dummy variable ∑DYEAR
6 years of sample data with 5-year dummy variables
3.3 Regression model
Referring to regression models from Sesil et al. (2002) and Anderson and Reeb (2003), I adjusted the independent variable of incentive plan as a dummy variable and constructed the following model:
27 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 = 𝛽0+ 𝛽1𝑇𝑒𝑐ℎ𝑖𝑛𝑐𝑡 + 𝛽2𝑀𝑛𝑔𝑒𝑟𝑠ℎ + 𝛽3𝑇𝑒𝑐ℎ𝑖𝑛𝑐𝑡 × 𝑀𝑛𝑔𝑒𝑟𝑠ℎ
+ ∑ 𝛽𝑖𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + ∑𝐷𝑖𝑛𝑑𝑢𝑠𝑡𝑦 + ∑Dyear + 𝜀 10
𝑖=4
In this model, Performance will be measured by ROA and Tobinq respectively. Techinct is the dummy variable measuring equity incentive for technological talents. In each year period, if core technology employees are granted equity incentives, the value is set as 1, otherwise 0. Mngersh is the ratio of senior executives’ shareholdings and total shares. A mediating variable is constructed by multiplying Tchinct and Mngersh and the complementary effect of executive shareholding will be verified by 𝛽3. Controls are seven corporate characteristic variables, including ownership structure, leverage ratio, firm age, firm scale, executive compensation, firm growth opportunity and firm controller.
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4. EMPIRICAL FINDINGS
4.1. Descriptive Statistics
Table 4 summarizes descriptive characteristics of the sample. As can be seen in following table, these firms have a mean value of 0.0159 in ROA, with a standard deviation of 0.0226 and a median of 0.0102. The average ratio of Tobinq is 4.01 and the standard deviation is 2.77. The average dummy value of equity incentive for core technical talents was 0.19, indicating that 19% of these firms implemented equity incentive plans for core technology personnel during 2011 and 2016. The average percentage of executive shareholding is 18.48%.
Table 4
Descriptive characteristics
Variables Mean St. dev 10% 25% 50% 75% 90% ROA 1.59 2.26 0.01 0.42 1.02 1.99 3.75 Tobinq 4.01 2.77 1.70 2.22 3.22 4.77 7.29 Techinct 0.19 0.39 0.00 0.00 0.00 0.00 1.00 Mngersh 18.48 19.91 0.01 1.38 11.88 32.51 47.30 Compen 1.49 1.02 0.61 0.88 1.24 1.76 2.56 Top 1 32.20 12.71 16.93 22.56 30.26 40.29 50.81 Growth 27.17 45.13 -10.82 3.61 20.07 37.71 67.59 Leverage 25.76 15.88 7.29 13.12 22.97 35.50 48.41 State 0.01 0.12 0.00 0.00 0.00 0.00 0.00 Age 15.10 4.02 10.00 13.00 15.00 17.00 21.00 Lnasset 21.09 0.74 20.25 20.57 20.98 21.52 22.08
Table 5 presents the main correlation coefficient matrix in variables. Pearson’s correlation coefficients show that there is no significant relationship between two independent variables, Techinct and Mngersh. Most control variables seem not to have significant relation with Techinct except Leverage and share concentration. Most control variables have significant correlations with shareholdings of the management. The management tends to hold less shares in larger firms (coefficient=-0.113,
p<0.01). As showed in Table 5, the ownership structure also significantly influences executive shareholding. The more ownership concentration is, the shareholdings of executives are larger. State-owned firms granted less shares to the executive,
29 compared to publicly-held firms. Also, the compensation of the management has negative relationship with the management shareholding. Both Leverage and firm size have significant impact on executive shareholdings and equity incentives for technical talents.
30 Table 5 Correlation matrix 1 2 3 4 5 6 7 8 9 10 11 1. ROA 1.000 2. Tobinq 0.987*** 1.000 3. Techinct 0.268*** 0.279*** 1.00 - 4. Mngersh 0.141*** 0.145** 0.014 1.00 - - 5. Compen 0.050** 0.032 0.002 -0.111*** 1.00 6. Top1 0.097*** 0.010 0.067*** 0.083*** -0.148*** 1.00 - 7. Growth -0.027 0.020 0.001 -0.010 0.067*** -0.054** 1.00 - 8. Leverage -0.210*** -0.12*** -0.111*** -0.094*** 0.109*** -0.033 0.215*** 1.00 9. State -0.001 0.01 -0.020 -0.083*** 0.033 0.035 -0.04* -0.037* 1.00 10. Age -0.03 -0.05** -0.025 0.004 -0.014 -0.083*** -0.036* 0.012 0.027 1.00 11. Size -0.012 -0.19*** -0.053** -0.113*** 0.359*** -0.123*** 0.224*** 0.351*** -0.001 -0.02 1.00 Triangular cells report Pearson’s correlation coefficients.
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4.2 Results of hypothesis tests
4.2.1 Equity incentive for technical talents & firm performance
To test the impact of equity incentive for technical employees on company performance, I conducted OLS regression method to analyze corporate performance variables ROA and Tobinq, respectively. Table 6 and Table 7 present summarized statistics of the regression model using ROA and Tobinq as dependent variables respectively. Based on the sample of 2224 observation in fiscal years from 2011 to 2016, the regression results of Table 6 show a significantly positive relationship between the equity incentive for technical talents and firm’s ROA in each sample year since the coefficient of 𝛽1 is 0.008 (p<0.01) and Table 7 also indicates a significant influence of equity incentives for technical talents on Tobinq as the value of 𝛽1 is 1.052 (p<0.01).
The first hypothesis investigates equity incentives for technical talents exerts a positive influence on firm performance. Specifically, it is expected that whether firms that implement equity incentive plan for technical talents perform better than those don’t implement. In order to prove the hypothesis 1, the p-value of 𝛽1 is expected not to exceed 0.1. Consistent with the hypothesis 1, the coefficient and p-value of 𝛽1 in two tables present significant results, showing that the influence of equity incentive for technical talents is positively significant on both ROA and Tobinq.
Overall, from the empirical results in the model of both ROA regression and Tobinq regression, the performance of companies with technical personnel equity incentives is significantly better than those without equity incentives for technical personnel. This is also in consistency with the analysis of Liu et al. (2013), which concludes that core IT staff increased corporate value while general IT staff did not increase corporate value by comparing the impact of both staff groups in firm performance.
