Can the Convexity of Equity Incentive Contracts Shape Executive Risk Preferences and Innovation Orientation?

Abstract

Using Chinese A-share listed firms from 2005 to 2024, this paper systematically identifies whether equity incentives shape executive risk preferences and further affect firms' innovation orientation. To mitigate the negative weights and "bad comparison" problem of two-way fixed effects estimators under staggered adoption, this paper introduces cohort-robust estimators, randomization inference, two-way clustered standard errors, firm-block bootstrap mediation tests, and dose-response curves in addition to conventional event studies. The main findings are as follows. First, the implementation of equity incentives significantly increases executive risk preferences; in the cohort-robust event study, pre-treatment trends are flat and post-treatment effects increase monotonically. Second, the positive effect on innovation orientation is highly fragile: although the static model yields a significantly positive estimate, the Sun-Abraham estimates decline after treatment and even become significantly negative, suggesting that the positive coefficient from conventional TWFE is mainly driven by bias from staggered treatment. Third, the stimulated risk preference is consistently translated into real R&D investment, but not into innovation discourse in annual reports. Fourth, incentive intensity exhibits an inverted U-shaped relationship with both risk preference and innovation orientation. Accordingly, this paper argues that the policy value of equity incentives lies in channeling induced risk taking into real R&D investment and long-term value creation through moderate intensity, longer contract duration, and innovation-oriented performance clauses.