The impact of equity incentive plans on analysts' earnings forecasts and stock recommendations for Chinese listed firms: An empirical study

Using a sample of 932 listed firms and 2492 firm-year observations during the period of 2008-2014, this paper investigates the impact of equity incentive plans (EIPs) on the information environment of financial analysts, as reflected in the prominent analysts' outputs - earnings forecasts and stock recommendations, in China's unique corporate setting. It finds that analysts' forecast accuracy is noticeably higher for listed firms with higher levels of management compensation in the form of EIPs. In addition, financial analysts are more likely to issue favourable stock recommendations for listed firms granting management stock options. Moreover, analysts' forecast accuracy (dispersion/bias) appears to be considerably improved (reduced) when listed firms choose to use restricted stock units (RSUs), instead of stock options, in their EIPs, suggesting that the two types of equity incentives - stock options or RSUs - have different impacts on analysts' earnings forecasts. Overall, the empirical results of this study are consistent with the alignment view of managerial incentives. This study also shows that not all equity incentives have the same alignment effect. Indeed, compared to RSUs, the alignment effect of stock options is likely to be offset by managers' short-term opportunity behaviours.