The issue of “The Equity Incentive Regulation of listed company” published in December of 2005 has set a standard for regulating the equity incentive plan of listed companies. Since then, government has promulgated many policies, and the number of companies who have implemented equity-based incentives plan increases rapidly. By 2013, the number of listed company implemented equity incentive plan has increased more than 13 times, and the equity incentive plan plays a significant role in corporation governance.

The main feature of modern enterprise plan is the separation of ownership and operation power, and this may cause information asymmetry and the agency problem between the owner and the manager of the company. The original intention of equity incentive plan is to encourage the manager to perform in accordance with the principle of maximizing the interests of shareholders, reduce or eliminate the manager’ short-term behavior and alleviate the interest conflicts. Equity incentive plan has important meaning on reducing the agency cost, building the firms’ long-term development mechanism, elevating the firms’ competitive ability plan. In order to obtain these benefits that the equity incentive plan brings, the owners of companies are willing to implement this meaningful policy. However, the equity incentive plan cannot achieve these aims by establishing the profit and risk sharing mechanisms between the owner and the manager. What is worse, the equity incentive plan is undermining the corporate governance structure. In real world, the equity incentive plan has gradually become a welfare plan for executives. It is a serious phenomenon that the executives make use of internal control force to lower down the exercise condition of equity incentive plan, so that the executives can get the interest of the equity incentive without any effort to raise the profits of the corporation. For example, in 2012 Jiayu Shares (300117) launched the first equity incentive plan with an exercise condition on the base of the net profit of previous year, and before the announcement of formal periodical financial reports. But two weeks later, Jiayu Shares published financial reports with a sharp drop in net profits. It is impossible not to doubt the reasonableness of the exercise condition of this equity incentive plan.

In recent years, more and more researchers have drawn their attention to the study of studies about equity incentive plan design, but fewer about the reason of welfare-tendency equity incentive plan design in China. Based on the China’s A-share market, we studied the relationship between the large shareholder’ tunneling behavior and the equity incentive strategy. Firstly we constituted an index to evaluate the welfare tendency of the equity incentive plan and severity of the large shareholders’ tunneling. Secondly, we explored how the large shareholders’ tunneling affected the welfare tendency of the equity incentive plan by building an order-probit model. Finally, we studied the consequence of welfare-tendency equity incentive plan on the corporation governance and put forward some feasible improvement suggestion of equity incentive plan.

Up until now the equity incentive plan has been introduced into China just for a short period of time, and the foundation of the equity incentive system is weak. Moreover, there is a big performance gap between companies published equity incentive plan. The current researches about equity incentive system are mainly focus on the effects on promoting the performance and reduce the agency cost. Recently, some studies draw their attention to the equity incentive plan design and indicate the welfare tendency of equity incentive plan in China. Yuhui Wu [1] thought the evaluation target of equity incentive is too easy for the incentive object, and thus increase the exercise probability of the equity incentive plan. The management group can get their interest from the stock option easily even if they do not work hard, so the incentive effects will be greatly reduced. Shufang Xiao [2] found that the evaluation target of equity incentive plan is on the low side, and the evaluation target design is too simple, providing convenience for the manager manipulating the business performance of the company. When the manager manipulates the business performance of base period, the incentive effects will be influenced for the whole incentives period of validity. Changjiang Lv [3] thought the equity incentive plan design is lack of positive incentive, and resulted in a performance manipulation of listed companies. These researches indicate the phenomenon of welfare tendency of equity incentive plan, but do not explain what is contributed to this result.

It is a popular phenomenon that the listed companies have a concentrated ownership structure. Large shareholders play a controlling role in cooperating governance, involving the whole process of the operation and the developing strategy. Liping Xu et al. [4] found that the ownership concentration in China Security Market is higher than other market, and the mean and the median of the shareholding ratio of the top five shareholders is as high as 54% and 56%. The large shareholder is in the absolute active control position of the company, and the agency problem between major shareholders and minor shareholders has become the main object of governance in modern company. As the actual controller of the company, the large shareholders have a strong motivation to tunneling the company in order to maximize their own interests. There are a number of ways for major shareholders to occupy the interest of the minor shareholders, for example, the connected transaction and capital invasion. And recent researches pointed out that it is very commonly some large shareholders expropriating the listed companies by connected transaction and capital invasion.

In order to explore the consequences of tunneling, some studies begin to focus on the ways of large shareholders how to get their interests. Renjun Zhou et al. [5] thought that, there are two ways for the large shareholders to gain their profits, one is get the capital appreciation or the dividend, and the other is tunneling. Large shareholders can enhance the supervision to management, so reduce agency cost, incents and restrict the self- interested behavior of executive. And large shareholders can also get involved in every detail of the company’s operations, providing some useful suggestions, raising the company’ performance. Moreover, large shareholders can conspire with the executive, so that they can tunnel the company without any obstacles coming from the company inside. Dongwei Su [6] found that major shareholders’ tunneling will weaken the negative relationship between executives departures and declining performance. Besides, there is some interest swap between major shareholders and executives. Executives can have higher perk consumption in the company with higher severity of tunneling. Further studies conclusively showed that the large shareholders hollowed the company mainly by conspiring with the executive and constructing some interest exchange tunnel. Pan Yiqing [7] constructed a model to analyze the coordinated behavior between managers and large shareholders, when the tunneling happened and found out that some executive assist to disguise the tunneling. Weimin Xie [8] used 2005-2011 mainboard listed companies as the research sample，and found that share proportion held by social security fund had a positive effect on company performance after controlling other variables’ influences. Jianxin Tang et al. [9] employed non-financial companies from 2003 to 2010 in China as the sample and analyzed whether equity ownership structure and the characteristics of board were conducive to tunneling. Xing Liu and Xianchong Wu [10] found that the nature of state-owned had a negative impact on the fund’s effective of improving the company performance.

On the base of these studies, we can find that, large shareholders exert great influence on corporate governance, not only on the operation of the company, but the design of incentive plan. In order to alleviate the interest conflict caused by tunneling, executive can usually get some convenience provided by large shareholders in earning management or get some direct perk consumption. Even more, large shareholders can reduce the difficulty of exercise equity incentive stock option to compensate the executive. So it is also possible to assume large shareholders exert great influence on the plan design of equity incentive strategy. From the perspective of conspiracy, we look forward to make a study about the relationship between tunneling and equity incentive strategy, and raised the proposed hypothesis as follows:

Hypothesis 1: severity of tunneling has a significantly positive correlation with welfare tendency of the equity incentive plan. That is to say it is more possible to make a welfare-tendency equity incentive plan for the company with higher tunneling.