We examine whether equity-based compensation increases shareholder value for firms domiciled in weak institutional environments.We test our idea using a unique event study in China where publicly listed Chinese firms on the domestic stock exchanges were legally permitted to adopt equity-based compensation schemes for the first time.We find that the stock market expected the regulations to result in an economically significantly increase in shareholder value for firms (both SOEs and non-SOEs) with high mutual fund ownership relative to firms with low mutual fund ownership.We test two non-mutually exclusive explanations for the more positive stock market reactions for firms with high mutual fund ownership: (a) firms with high mutual fund ownership are better governed and therefore these firms are under greater pressure to adopt equity-based compensation schemes;(b) all firms have an incentive to adopt equity-based compensation schemes but firms with high mutual fund ownership are better governed and therefore more effective in designing shareholder value maximizing equity-based compensation schemes.We find support for the first explanation but little support for the second explanation.