Abstract: Classic asset pricing theory equate stock prices with the present value of expected future dividends, discounted at appropriate discount rates. Hence, in an efficient stock market, prices change to reflect revisions in the investors' expectations about firms' future earnings. Whether firms' future earnings are fully impounded into the current stock prices depends on investors' ability to predict it. Prior studies have shown that firm's disclosure activity significantly affect investors' ability to predict future earnings, specifically, firms with relatively higher earnings quality and more informative voluntary disclosures assist investors in better pricing future earnings.
Meanwhile, firm's disclosure activity is affected by managerial equity incentives (MEIs). On the one hand, equity incentives can improve the firms' earnings quality and encourage managers to voluntarily provide additional private information to the market. On the other hand, equity incentives can induce managers to manipulate their firms' earnings and voluntary disclosure in order to maximize their remuneration. If equity incentives encourage managers to provide higher quality earnings or more informative voluntary disclosure to the market, investors will be better able to predict future earnings. In contrast, if equity incentives induce managers to manipulate their firms' earnings and voluntary disclosure, it will be difficult for investors to predict future earnings. Which effect dominates in a cross-sectional setting is an unanswered, empirical question that this paper investigate.
Using the data of Chinese A-share listed companies that implemented equity incentives during 2006-2016, it is found that MEIs strengthens the association between current returns and future earnings, indicating that MEIs help investors to better price firms' future earnings. By decomposing future earnings into industry-wide and firm-specific components, it is found that MEIs do not influence investors pricing industry-wide component of future earnings, but it accelerate the pricing of firm-specific future earnings. In addition, managerial stock incentives help investors to better price future earnings and accelerate the pricing of firm-specific future earning, but option incentives do not. This paper offers two main contributions. First, it reveals the micro-mechanism that how MEIs assist investors in better pricing future earnings. Second, given that investor's ability to price future earnings reflects the information efficiency of the stock market, it provides an important theoretical reference for regulators to improve the information efficiency of Chinese stock market.

Key words: equity incentives, the pricing of future earnings, firm-specific future earnings, industry-wide component of future earnings