Does Allowing Publicly Listed Firms to Adopt Equity-Based Compensation Increase Shareholder Value? Evidence from China

We examine whether allowing publicly listed firms to adopt equity-based compensation increases shareholder value for firms domiciled in weak institutional environments. We test our idea using a series of regulations in China that allowed publicly listed Chinese firms to adopt equity-based compensation for the first time. Consistent with prior research, we find that shareholder value did increase for the firms that adopted equity-based compensation schemes. However, we find that only 16% of the publicly listed Chinese firms adopted equity-based compensation schemes seven years following the passage of the first regulation. We find little evidence that the stock market reactions to the events associated with the passage of the regulations were significant for the entire stock market portfolio or the sub-portfolios of SOEs and non-SOEs. Overall, our results support Core et al.’s (2003) conjecture that the efficacy of equity-based compensation hinges on a country’s institutional environment quality.