As a part of the ongoing liberalization of the marketplace, Chinese regulators adopted the guideline called “Regulation of Equity Incentive Plans (trial)” to allow firms to provide employee incentives through employee stock option plans. Firms began initiating the plans in 2006. We investigate the impact of these plans on firm performance by comparing option-award firms with similar non-award matching firms. The change in ROE for the option-award firms is significantly higher than the matching firms. This is primarily due to their performance holding up better during the global financial crisis while the matching firms’ performance deteriorates. The stock price of these firms shows a positive reaction to the announcement, but no long-term abnormal returns. The better ROE performance for option-award firms is strong for subsets of the sample that are likely to benefit more from incentivized employees; specifically, privately owned firms, firms with higher board independence, and smaller firms. After various robustness tests, we conclude that the higher performance comes from the employee incentives, rather than earnings manipulation, a replacement of cash compensation, a binding of employees to executives, or gaming vesting periods.

We find a positive relation between product market competition and corporate investment using a sample of Chinese manufacturing firms during 1999–2010. A quasi-natural experiment and change regressions yield consistent evidence. We postulate that China's high and predictable growth rate, as it transitions from a developing economy to a developed economy, is what drives the positive relation between competition and investment. We directly test and provide support for this growth-oriented explanation. We also find that high investment under high competition is a value-enhancing proposition for firms. Finally, we test whether some firm types are more likely to invest under high competition in a growing economy, and we find that firms with high predation risk and firms that are industry leaders invest more.