This paper makes an empirical analysis on influence relation of manager equity compensation on R&D investment under different nature of controlling stake by applying multivariate regression analysis and ordinary least square and taking China listed companies from 2007-2012 as samples. The study finds that in state controlled enterprises, management shareholding ratio has positive influence relation on R&D investment intensity; in non-state-controlled enterprises, management shareholding ratio has “range effect” influence relation on R&D investment intensity. The research of this paper can further expand existing relevant theory of corporate governance and R&D investment, and provide theoretical support and decision reference for enterprises to optimize compensation contract and correct R&D underinvestment.
R&D investment is the key process of enterprise technology innovation, which is the main drive to improve the enterprise competitiveness (Dosi, 1988 [
The above literature review shows that though the research on the relationship between manager equity compensation and R&D investment are relatively abundant, the results are quite different. Besides the difference in countries selection, sample quantity and time window, the main reason is that most research ignores the difference in the enterprise nature of controlling stake, which may lead to error and inconsistency in conclusions. Therefore, this study takes the Chinese listed companies as samples and divides the samples into state controlled enterprises and non-state controlled enterprises based on nature of controlling stake, to analyze the effect of manager equity compensation on R&D investment under different nature of controlling stake. The conclusion of this study can further explore corporate governance and R&D investment theory, and also provide theoretical and decision support to optimize manager compensation contract and correct R&D underinvestment for modern companies. The study contains background, theoretical analysis and research hypothesis, research design, empirical results and analysis, robust testing and research conclusions, etc.
Since 1978, Chinese economy has reformed from planned economic system to market economic system. As the gradual establishment of market economy system and the further reformation of state-owned enterprise, in order to improve the profitability and competitiveness of state-owned enterprise, motivate managers and reduce agency cost, the Chinese Government reformed the motivation mode of the state-owned enterprise in five stages.
Firstly, the stage of the exploration and establishment of annual salary system. After the reform and opening- up, the Chinese government started market orientation enterprise reform, and performance related pay has emerged in the manager remuneration design in state-owned enterprises. Up to 1997, the annual salary system of state-owned enterprise executive has been the most important remuneration arrangement, but the annual salary was based on accounting performance, which was used to measure the company’s short term performance, and the short term performance was inclined to lead the short term investment decision, and might be contradict with the aim of shareholder wealth maximization. The drawbacks of short term incentives based on accounting performance became more apparent over longer time, which severely restricted the enterprise creativity and competitiveness.
Secondly, the exploration stage of managers equity incentives. Since 1997, the business community began to pilot reform of equity incentive for the managers, and Shanghai pioneered to trail the CEO equity incentives, and followed by Wuhan, Zhejiang, Beijing, and Tianjin, etc.
Thirdly, the establishment stage of equity incentive system. On the basis of practice and theoretical exploration, equity incentives was acknowledged and established by the government policies. In August 1999, the “Decision of the CPC Central Committee and the State Council on Strengthening Technical Innovation, Developing High Technology and Realizing Industrialization” proposed that permitting and encouraging technology and management and other production factors to participate in earning distribution, and piloting in some high-tech companies to take a certain percentage of increase in state-owned net asset as share to reward employees with outstanding contributions especially technology employees and the managers. In the same year, the “Decision of the CPC Central Committee on the Major Issue Concerning the Reform and Development of State-owned Enterprise” stressed once again “establish and improve the motivation and restriction mechanism for the managers in state-owned enterprise. Implement performance related pay, and continue to trial manager (director) annual salary in some enterprises and share option and other distribution methods to sum up experience timely”.
Fourthly, the imperfection stage of manager equity incentives system in state-owned enterprises. On September 9, 2005, SASAC issued “the related issues on stated owned equity in the reform of non-tradable shares in listed companies”, which pointed out that the state-owned listed companies which had completed non-tradable share reform could explore to implement management equity incentives. On December 31, 2005, China Security Regulatory Commission issued “The management of Equity Incentives in Listed Companies (Trial)”, allowing granting restrictive shares and share options to executives in listed companies, proposing restrictive shares and share options as the main ways of equity incentives, and defining the implement procedures and information disclosure requirement for equity incentives. The Company Law (2006) which became operative as of January 1, 2006 stipulated that the senior managers could transfer no more than 25% of the shares of its own company which he held during his tenure, and excluded legal obstacles for the implements of share options. On March 1 2006, “The Trial Scheme for the Implementation of equity incentives in Oversea State-owned listed Companies”, which was jointly issued by SASAC and Ministry of Finance, became operative. However, since the imperfection of related regulations relating manager equity incentives, alienation appeared in equity incentives in practice, a few managers abused the loopholes and defects in regulation, which led to the losses of state- owned assets. Perhaps for the controversy and fear of state-owned assets losses, equity incentives have always been shambling in state-owned enterprises reform.
Fifthly, the adjusted stage for manager compensation. The 2008 US subprime mortgage crisis triggered a global financial crisis. When reflecting the roots of financial crisis, managers remuneration was attacked as the main targets, and since then the restriction on manager’s high remuneration has been sweeping the globe from the US. In the background of global restriction on manager salary, and combined with the public criticism on the state-owned enterprise manager’s astronomical salaries, on August 17, 2009, the Ministry of Human Resources and Social Security of the PRC, in conjunction with the Organization Department of the CPC Central Committee, Ministry of Supervision, Ministry of Finance, Audit Commission, SASAC and other units, jointly issued the “Guiding opinions on Further Regulating the Remuneration of Central Government Owned Enterprises Executives”, which was also called “Remuneration Restriction Order on Executives of Central Government Owned Enterprises” by the public. Since then, equity incentives in state-owned and state-controlled enterprises were in a standstill.
At present, the manager shareholding ratio in state controlled listed companies is relatively low, and there are more enterprises in which managers have no shares. In non-state controlled listed companies, the shareholding ratio ranges in a relative large scope, generally shareholding ratio of the managers who are the founder is higher, and the shareholding ratio of the managers who are recruited in the manager’s market is lower. Therefore, considering the self-interest maximization, different nature of controlling stake and managers with different shareholding ratio may have different influence on R&D investment. Based on this, the research on the influence of manager’s equity remuneration on R&D investment in different nature of controlling stake enterprises, is of important theoretical and practical significance.
R&D investment is an important drive to improve company innovation ability and competitiveness, however, in modern companies in which the ownership and management are separated, R&D investment may cause the interests conflicts between shareholders (the principals) and managers (the agents) (Du and Lin, 2011) [
Mangers’ equity compensation has comparably complex influence on R&D investment intensify, and its influence relationship mainly depends on the manager’s shareholding ratio. Interest convergence hypothesis believes that equity compensation makes manager own shares, managers with “golden handcuffs” naturally form interests alliance with shareholders (Mehran, 1992) [
At present, in state-controlled enterprises, management shareholding ratio is relatively low, and there are many “zero” shareholding enterprises, manager shareholding ratio doesn’t has managerial entrenchment effect and possibly has interest convergence effect; while in non-state-controlled enterprise, manager shareholding ratio is comparably in a large scope, and management shareholding may have “range effect” on R&D investment, which presents nonlinear relationship. Based on the above analysis, this paper proposes the following hypothesis:
H1: In state-controlled enterprises, managers’ equity compensation is positively correlated with company R&D investment.
H2: In non-state-controlled enterprises, managers’ equity compensation is nonlinear correlated with company R&D investment.
In Equation (1), the explained variable is the proportion of current R&D expenditure in total assets at the end of the current period (RD_TAt); the test variables are manager shareholding ratio in current period (MAN_SRt), managers’ shareholding ratio square in current period
The name, symbol and definition of each variable are shown in
Explained variables: This paper uses indicator design of Liu and Liu (2010) [
Test variables: In order to test whether the manager shareholding ratio has “range effect” influence relationship on R&D investment, this paper uses the indicator design of Liu (2014) [
Control variables: 1) In selecting manager annual salary variables, this paper uses the indicator design of Liu (2014) [
The study samples in this paper come from Shanghai and Shenzhen A-share listed companies of China during
Name | Symbol | Definition |
---|---|---|
The proportion of current R&D expenditure in total assets | RD_TAt | R&D expenditure in current period ÷ total asset at the end of the current period |
The proportion of last R&D expenditure in total assets | RD_TAt-1 | R&D expenditure in last period ÷ total asset at the end of the last period |
The proportion of current R&D expenditure in operating income | RD_ORt | R&D expenditure in current period ÷ total operating income in current period |
The proportion of last R&D expenditure in operating income | RD_ORt-1 | R&D expenditure in last period ÷ total operating income in last period |
Manager shareholding ratio in current period | MAN_SRt | Number of shares held by executives in current period ÷ total shares in current period |
Manager shareholding ratio square in current period | (Number of shares held by executives in current period ÷ total shares in current period)2 | |
Manager shareholding ratio cube in current period | (Number of shares held by executives in current period ÷ total shares in current period)3 | |
The logarithm of managers’ total remuneration in current period | LnMAN_PAYt | The natural logarithm of the top three executives’ total remuneration in current period |
The ratio of non-executive director in the board | BOARD_STt | The number of non-executive directors at the end of current period÷ number of directors at the end of current period |
Financial gearing | LEVt | Total liability at the end of current period ÷ Total assets at the end of current period |
The total operation income in current period | LnCsizet | Ln (operating income in current period) |
Annual variable | Yearj | Dummy variable, take value 1 in the jth year, or take value 0 |
Industry variable | Indum | Dummy variable, take value 1 in the mth industry, or take value 0 |
2007-2012, based on which we make a rational screening. The procedures are listed as follows: 1) get rid of financial companies; 2) get rid of ST company and *ST company as ST company and *ST company’s business activities and financial activities may have abnormal variation; 3) in order to inspect the hysteresis effect of R&D investment, select listed companies that disclosed R&D for two consecutive years and get rid of listed companies with data missed; 4) for major continuous variables, detect whether they have abnormal values with box plots and Winsorize those variables with abnormal values. Finally, there are 943 samples in total; classify them by nature of controlling stake of the company into 523 state-controlled enterprises and 420 non-state-con- trolled enterprises. Other data come from CSMAR database and WIND database as well as the websites designated by CSRC, Sina Finance, CNINFO and China Securities Journal, etc. We draw part of the sample data to check with the annual report of listed companies and correct wrong data.
The descriptive statistics of the main variables in this paper are shown in
As shown in
Variables | The Whole Sample Enterprises | State-Controlled Enterprises | Non-State-Controlled Enterprises | ||||||
---|---|---|---|---|---|---|---|---|---|
Max | Min | Std. Dev. | Mean | Median | Mean | Median | Mean | Median | |
MAN_SRt | 0.351 | 0 | 0.109 | 0.056 | 0 | 0.005 | 0 | 0.12 | 0.05 |
LnMAN_PAYt | 15.601 | 12.346 | 0.655 | 13.939 | 13.929 | 14.012 | 14.045 | 13.846 | 13.828 |
RD_TAt | 0.134 | 0 | 0.034 | 0.026 | 0.013 | 0.024 | 0.01 | 0.028 | 0.017 |
LEVt | 0.974 | 0 | 0.22 | 0.414 | 0.424 | 0.5 | 0.51 | 0.304 | 0.288 |
LnCsizet | 25.228 | 18.454 | 1.44 | 21.029 | 20.814 | 21.632 | 21.406 | 20.266 | 20.088 |
Variables | Parameter Test (T Test) | Non-Parameter-Test (Mann-Whitney U Test) | |||||
---|---|---|---|---|---|---|---|
Mean | T Value | P value | Median of State-Controlled Enterprises | Median of Non-State-Controlled Enterprises | Z Value | P value | |
MAN_SRt | 0.115** | 23.825 | 0 | 0 | 0.051 | 19.885** | 0 |
LnTTE_Pt | −0.167** | −4.913 | 0 | 14.045 | 13.83 | −5.460** | 0 |
RD_TAt | 0.005* | 2.356 | 0.017 | 0.01 | 0.017 | 5.010** | 0 |
Note: Z value represents a significant degree; P value indicates significance level corresponding to the Z value; *, **represents significant level at 0.01 and 0.05 respectively, two-tailed test.
The regression results are in
In model 2 and model 3, the regression coefficient of influence relation of management shareholding ratio(MAN_SRt) on R&D investment intensity(RD_TAt) is positive in state-controlled enterprises and significant at 10% level; the regression coefficient of influence relation of management shareholding ratio square
In model 4 and model 5, the regression coefficient of influence relation of management shareholding ratio(MAN_SRt) on R&D investment intensity(RD_TAt) is significant positive in non-state-controlled enterprises at 5% level; the regression coefficient of influence relation of management shareholding ratio square
To test reliability of above study conclusion, on the basis of the above model, this paper replaces ratio of current R&D expenditure in total assets at the end of current period (RD_TAt) indicator with ratio of current R&D expenditure in current operating revenue (RD_ORt) indicator. Make econometric regression for whole sample enterprise, state-controlled enterprise and non-state-controlled enterprise of Shanghai and Shenzhen A-share listed companies in China during 2007-2012, the regression results are shown in
The study samples in this article come from Shanghai and Shenzhen listed companies of China during 2007- 2012. With multivariate regression analysis and ordinary least square, this paper studies the influence relationship of manager’s equity compensation on R&D investment in different nature of controlling stake enterprises.
Variables | The Whole Sample Enterprises | State-Controlled Enterprises | Non-State-Controlled Enterprises | ||
---|---|---|---|---|---|
Model 1 | Model 2 | Model 3 | Model 4 | Model 5 | |
MAN_SRt | 0.060* | 0.598* | 0.464* | 0.210** | 0.140** |
(1.87) | (1.85) | (1.70) | (2.26) | (2.30) | |
−0.520 | −8.796 | −5.595 | −1.089* | −0.820* | |
(−0.59) | (−1.01) | (−0.94) | (−1.71) | (−1.90) | |
1.215 | 23.71 | 12.35 | 1.599* | 1.497* | |
(0.70) | (1.37) | (0.63) | (1.85) | (1.73) | |
LnTTE_PAYt | 0.008 | −0.007* | −0.006* | 0.010*** | 0.009*** |
(1.53) | (−1.69) | (−1.78) | (3.52) | (2.78) | |
BOARD_STt | −0.008 | −0.026 | 0.035 | ||
(−0.38) | (−0.97) | (1.04) | |||
RD_TAt-1 | 0.695*** | 0.680*** | 0.667*** | 0.559*** | 0.701*** |
(18.80) | (15.07) | (13.30) | (12.57) | (13.11) | |
LEVt | −0.015* | −0.017* | −0.024** | −0.021** | −0.011* |
(−1.85) | (−1.76) | (−2.13) | (−2.13) | (−1.91) | |
LnCsizet | −0.001* | −0.002* | −0.001* | 0.001 | 0.001 |
(−1.71) | (−1.81) | (−1.69) | (0.35) | (0.28) | |
Indum | control | control | control | control | control |
Yearj | control | control | control | control | control |
N | 943 | 523 | 523 | 420 | 420 |
adj. R2 | 0.517 | 0.426 | 0.515 | 0.498 | 0.528 |
Note: t statistics in parentheses, *p < 0.1, **p < 0.05, ***p < 0.01.
Variables | The Whole Sample Enterprises | State-Controlled Enterprises | Non-State-Controlled Enterprises | ||
---|---|---|---|---|---|
Model 1 | Model 2 | Model 3 | Model 4 | Model 5 | |
MAN_SRt | 0.204* | 1.573** | 1.473** | 0.316* | 0.230* |
(1.79) | (2.57) | (2.09) | (1.84) | (1.74) | |
−1.544 | −21.91 | −17.70 | −2.061* | −1.406* | |
(−0.91) | (−1.26) | (−1.63) | (−1.81) | (−1.67) | |
3.291 | 58.54 | 42.26 | 3.587* | 2.671* | |
(0.98) | (1.20) | (1.18) | (1.89) | (1.82) | |
LnTTE_PAYt | 0.020 | −0.019*** | −0.020** | 0.021*** | 0.021*** |
(1.51) | (−1.74) | (−1.83) | (3.10) | (2.89) | |
BOARD_STt | 0.002 | −0.031 | 0.071 | ||
(0.05) | (−0.65) | (0.93) | |||
RD_ORt-1 | 0.693*** | 0.631*** | 0.641*** | 0.648*** | 0.714*** |
(20.09) | (13.23) | (12.63) | (15.10) | (15.01) | |
LEVt | −0.021* | −0.016* | −0.026* | −0.047** | −0.029* |
(−1.73) | (−1.78) | (−1.87) | (−2.30) | (−1.74) | |
LnCsizet | −0.006** | −0.007*** | −0.005* | 0.007 | 0.008 |
(−2.36) | (−2.81) | (−1.88) | (1.59) | (1.56) | |
Indum | control | control | control | control | control |
Yearj | control | control | control | control | control |
N | 943 | 523 | 523 | 420 | 420 |
adj. R2 | 0.503 | 0.431 | 0.507 | 0.457 | 0.512 |
Note: t statistics in parentheses, *p < 0.1, ** p < 0.05, ***p < 0.01.
The study finds that in state-controlled enterprises, the manager’s equity compensation has significant positive influence on R&D investment; while in non-state-controlled enterprises, the manager’s equity compensation has significant “N” shape influence relationship on R&D investment.
The conclusion of this paper has important implication on optimizing manager equity contract design and correcting company R&D underinvestment; scientific manager equity contract design is an important system arrangement in motivating manager to increase R&D investment and is the drive to increase the company R&D investment intensity. Through the above analysis, it is not difficult to find that, in state-controlled enterprises, in order to fully explore manager equity incentive on R&D investment, we should accelerate manager shareholding plan, reduce executives “zero shareholding” companies, appropriately increase manager shareholding ratio, and achieve convergence with shareholder objectives; in non-state-controlled enterprises, we should scientifically design and control management shareholding ratio, prevent manager to reduce R&D investment and opportunity behaviors such as pursuing short term performance.
This paper is supported by the National Social Science Fund of China (No.13BGL051; No.14BGL037), Ministry of Education in China Project of Humanities and Social Sciences (No.11YJA630070), and Aeronautical Science Foundation of China (No.2013ZG 55030).