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The impact of equity incentive plans (EIPs) on accounting conservatism in listed Chinese firms

Sun Liu (International Business School Suzhou, Xi'an Jiaotong-Liverpool University, Suzhou, China) (Division of Business and Management, Beijing Normal University – Hong Kong Baptist University United International College, Zhuhai, China)
Jie Zhang (International Business School Suzhou, Xi'an Jiaotong-Liverpool University, Suzhou, China)

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 13 October 2020

Issue publication date: 25 January 2021

615

Abstract

Purpose

This study investigates whether listed firms using equity incentive plans (EIPs) adopt more conservative accounting in China's unique corporate setting.

Design/methodology/approach

Based on a sample of 2,243 listed firms and 9,950 firm-year observations for the period of 2008–2017, this study employs piecewise cross-sectional regression models with year and industry fixed effects to examine the associations proposed in the research hypotheses.

Findings

This study finds a positive relationship between the adoption of EIPs and accounting conservatism in listed Chinese firms. Further analyses reveal that this positive relationship is more pronounced when listed Chinese firms use restricted stock units (RSUs), instead of stock options, in their EIPs.

Research limitations/implications

Unlike many early studies, this paper empirically investigates the impacts of two different types of equity incentives – stock options and RSUs – and thus contributes to accounting and corporate governance literature by providing a better understanding of the impacts of different types of equity incentives on financial reporting quality. However, this study does not consider other alternative equity incentive measurements because of the limited data regarding Chinese firm's executive compensation.

Practical implications

This study offers investors and policymakers in China some insight into how accounting conservatism in listed firms might be shaped by equity incentives used in their managerial compensation schemes.

Originality/value

This study is one of the few that examines the effects of using equity incentives in a large emerging market. It offers support for the view that the recent introduction of policies on EIPs by the Chinese government has an overall positive impact on listed firm's financial reporting quality, as reflected by greater degrees of accounting conservatism.

Keywords

Citation

Liu, S. and Zhang, J. (2021), "The impact of equity incentive plans (EIPs) on accounting conservatism in listed Chinese firms", Journal of Applied Accounting Research, Vol. 22 No. 1, pp. 50-71. https://doi.org/10.1108/JAAR-01-2020-0013

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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