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In 2006 the Chinese Securities Regulatory Commission permitted equity-based compensation.In the three-day event window surrounding the regulatory announcement and subsequent firm announcements of equity-based compensation plans,stock values increase approximately 20%.Comparing stock and accounting performance to a matched sample of firms not adopting equitybased compensation,firm performance drops during the period between the announcement and plan implementation (consistent with managerial power),but performance increases following plan implementation (consistent with convergence of interest).Investors anticipate improved performance following the implementation of equity-based compensation; however,faster adoption processes may reduce the underperformance between the firm announcement and final implementation.