Abstract: Because enterprise annuity can be seen as a kind of managerial subsidy, which can therefore reduce the future possible debt financing risks, those top executives with no shares of their companies will consequently have incentives to establish enterprise annuity in order to maintain financial slack. The enterprise annuity decision may increase the value of single human capital, so as to deal with the harm to the top executives’ interests caused by the maximized shareholders equity. Along with the increase of managerial share holdings, the incentives to establish such enterprise annuity will decrease since the interests of the top executives and the shareholders become more consistent. The results presented in this study can strongly support the proposition that substitution effect exists between the top executive stock rights and enterprise annuity. Enterprises can achieve effective incentives to human capital through the mixed equilibrium strategy between top executive stock rights and enterprise annuity.

Key words: long-term incentive; top executive stock rights; enterprise annuity; substitution effect; human capital