Abstract: Using the samples of listed companies in Chinese A share market which implemented equity incentive plans during the 2006-2012, and using the difference between the rights vesting performance requirements is set in equity incentive plan and company's past actual performance level to measure the independent variables, this paper investigates the relationship between performance-based equity incentive and the choice of earnings management modes. This paper finds that:the degree of real earnings management which implemented by the company with a "incentive" equity incentive plan is greater than the one which implemented by the company with a "non-incentive" equity incentive plan. The higher the exercise rights vesting performance requirements compared to company's past actual performance level is, the greater the extent of real earnings management induced is. In order to achieve the exercise rights vesting performance requirements, the listing corporation's managements will comprehensively use real earnings management and accrual-based earnings management. The results show that, it is very important to set reasonably performance indicators level in the equity incentive plans, and too high or too low performance indicators level would make the equity incentive effect run counter to our desire. The main contribution of the paper is that equity incentive intensity is measured according to exercise rights vesting performance requirements which is an innovation based on Chinese situation, and that the literature about the relation between equity incentives and earnings management are enriched from the perspective of real activities earnings management and the comprehensive use of real and accrued earnings management.

Key words: performance-based equity incentive, exercise rights vesting performance requirements, real earnings management, accrual-based earnings management