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The Effect of Equity Incentive on Innovation
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TitleThe Effect of Equity Incentive on Innovation  
AuthorZhang Qianqian,Zhou Mingshan and Dong Zhiyong  
OrganizationSouthwestern University Of Finance And Economics;Peking University;; 
Key WordsEquity Incentive; Innovation; Capitalization of R&D Spending; Trade-off 
AbstractManso (2011) argues that to motivate executive innovation, long-term incentives must be introduced to ease short-term performance pressures. Listed companies in China implementing equity incentive plan are usually use short-term performance as a condition of exercise, which means that executives are faced with the trade-offs between short-term performance and long-term stock price rise. Can equity incentives help executives to tolerate short-term innovation failure? This study finds that with the implementation of equity incentive plan, enterprise innovation investment and patent output increase significantly. Executives tend to "inflate" capitalization of R&D expenditure to ease short-term performance pressure. With the capitalization of R&D expenditure increasing significantly, the output rate of capitalization of R&D investment is significantly reducing. Furthermore, external supervision such as analyst tracking and fund holdings help to reduce the inflation risk of capitalization of R&D spending after implementing equity incentives. This paper analyzes the mechanism of equity incentive to promote enterprise innovation from the perspective of accounting policy choice of R&D expenditure, which provides a new perspective to the research of equity incentive effectiveness. 
Serial NumberWP1423 
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