Ever since Jensen and Meckling pointed out that equity incentives can improve agency cost between shareholders and the management, many studies had provided empirical evidence for the internal governance effects of equity incentives. However, there are few studies on whether equity incentives have external governance effects. Based on this, this paper studies whether equity incentives can attract more market attention and whether external market attention can motivate the management to achieve market expectations. This will provide some empirical evidence for whether equity incentives have external governance effects.

Equity incentives generally set exercise conditions for stock options or unlocking conditions for restricted stocks, and these conditions are based on certain performance targets. Generally, these performance evaluation targets are higher than before. Therefore, the implementation of equity incentives can signal to the capital market that the management will work harder to improve company performance. When this signal is passed to the capital market, it is bound to cause more market attention, and the market will set a goal for the management’s efforts. Whether the management achieves market expectations directly affects the management’s wealth. This is because if the management fails to meet the target set by the market, the company’s stock price will fall, and the management’s personal wealth will also decrease. On the other hand, the expected target set by the market can also be regarded as the market’s estimation of the level of the management effort. If the performance of the company announcement is lower than this estimate, it is easy for the market to believe that the management has not done its best to have lazy moral hazard suspects, which will stimulate the market to vote with their feet. and the gap between the company’s actual performance and market expectations is smaller. In the case of failure to meet market expectations, compared with companies that do not implement equity incentives, companies that implement equity incentives will meet market expectations to a lesser extent. Further research finds that the external governance effect of equity incentives mainly occurs in two-separated companies and private enterprises. This paper has implications for the literature and policies.