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目录
英文原文
Can non-executive equity incentives reduce internal control ineffectiveness? Evidence from China（节选）
Abstract
Using data from Chinese listed firms for the period 2012–2018, we provide new evidence that the intensity of non-executive equity incentives can reduce the likelihood of internal control weaknesses and improve internal control effectiveness. We also find that internal control weaknesses are more likely to be remedied in firms that implement strong non-executive equity incentive polices. Besides, we document novel results that employee equity incentives for non-executives can optimise the internal environment, improve the internal supervision system, and thereby reduce the operational-level weaknesses of a companyrsquo;s internal controls.
Introduction
1.1.Background
The quality of a firmrsquo;s internal control system has become an important topic related to the long-term growth of the firm and the healthy development of the entire capital market. In essence, the internal control of a firm is about people. If there is a lack of professional and/or technical personnel, or efforts equivalent to their responsibilities, it is difficult for operational defects to bediscovered promptly and repaired effectively (Doyle et al., 2007). Unlike top executives, employees who serve customers daily, handle various complaints, and directly participate in institutional arrangements, are more likely to find and repair internal control weaknesses (Guo et al., 2016). What can motivate non-executive employees, including middle-level managers and other employees that form the backbone of a firm, to work harder when implementing internal control regulations? In this study, we examine the role of equity incentives, a key component of monetary compensation, as a long-term mechanism in internal control construction in China. We document that incentives that improve core employee equity reduce internal control ineffectiveness.
Previous studies have mostly emphasised top executives as critical players in the firm (Balsam et al., 2014; Lin et al., 2014; Dai and Song, 2018; Li et al., 2019). There is evidence that the chief executive officer (CEO), chief financial officer (CFO) and other senior executives are responsible for internal control, and the implementation of equity incentives for them can improve the effectiveness of internal control in a firm (Balsam et al., 2014; Dai and Song, 2018). However, internal control is a comprehensive institutional arrangement involving different types of regulations and operating standards, it requires the collaboration of senior executives, middle managers and other employees (Guo et al., 2016). Non-executives have gradually become the subject of equity incentives in China.1 The principal grantees of non-executive equity incentives are middle-level managers and other similar core employees in Chinese public companies.2 These non-executive grantees are typically the heads and participants of the internal control system in the critical departments of the enterprise. They assume essential responsibilities in the formulation and implementation of specific rules and operating standards for internal control. From the definition in the Internal Control-Integrated Framework proposed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), internal control of the enterprise can be divided into three dimensions: governance layer control, management layer control, and operation layer control (COSO, 2013). The CEO and CFO are at the governance layer, while the principal grantees of non-executive equity incentives for Chinese public companies constitute the core subject of management and operational control in internal controls.
Some prior work has shown that internal control problems are associated with higher capital costs (Ashbaugh-Skaife et al., 2009; Kim et al., 2011) and declines in stock price (Hammersley et al., 2008; Balsam et al., 2014). The negative consequence of ineffective internal control would translate into lowerfirm valuation and reduce the value of restricted stock or stock options held by employees. Therefore, there is need for further exploration of whether implementing equity incentives for non-executive employees can help Chinese firms form a benign constraint mechanism, inspire and improve non-executive employeesrsquo; ability to detect and repair internal control defects, and promote the effective operation of a firm. Before January 2012, the internal control information of listed companies in China was in the voluntary disclosure stage (Dai and Song, 2018). Our analysis focuses on the sample of Chinese A-share, non-financial listed companies for period 2012–2018.
1.2.SituationinChina
Unlike developed markets, the development of Chinarsquo;s capital market stems from the start of various administrative policies (Han et al., 2018). The start of non-executive equity incentives in China also coincides with the incentive reforms. On 31 December 2005, the China Securities Regulatory Co
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