The Impact of Equity Incentives on Idiosyncratic Risk: Evidence from the Panel Regression Analysis

Abstract

Idiosyncratic risk of listed firms has attracted the attention of a series of researchers. Using the data of A-share listed firms in the Shanghai Stock Exchange and Shenzhen Stock Exchange, we examine the impact of equity incentives on listed firms’ idiosyncratic risks. Based on the panel regression model and fixed effects model, we find that the degree of equity incentives is positively correlated with idiosyncratic risk. This correlation is robust to a series of robustness checks including the use of alternative samples and the inclusion of some possibly omitted variables. Further analysis shows that equity incentives would not infect the idiosyncratic risk of SOE companies, but have a significant and positive impact on the idiosyncratic risk of non-SOE companies; the impact of equity incentives is more pronounced to the firms with better corporate governance, which have Big-4 auditors and more analysts. These findings provide support to the notion that equity incentive is positively associated with corporate idiosyncratic risk.