The Relationship Between Accounting Information Valuation Function And Incentive

Accounting information plays two key roles in capital market, which are valuation role and contracting role. For contracting role, the usage of accounting information in compensation contract is an important application, which we called incentive role or stewardship role. Lots of papers have studied the valuation role and incentive role of accouting information. Recently, researchers began to focus on the correlation between these two roles. These studies try to find out whether these two roles of accounting information are independent or not. The conclusions in analytical studies are not exactly consistent with what in empirical studies. Based on extant literature, assuming that managers are risk-averse and they have some private information, I analytically and empirically study the correlation between valuation role and incentive role of accounting information based on Chinese stock market data.Firstly, I study the influence of information noise on the valuation role and incentive role of accounting information.I wish this test could provide some indirect evidence of the correlation between these two roles of accounting information. Secondly, I construct a model based on the assumption that managers are risk-averse and they have some private information or signals.Based on the model, I make hypothesis about the correlation between valuation role and incentive role of accounting information. Finally, using Chinese stock market data, I empirically test the hypothesis. In the empirical test, I specifically study accounting earnings as the proxy of accounting information.The conclusions are as follows. First, the noise of accounting earnings negatively influences both the valuation role and incentive role, which demonstrating that there is a possibility for the correlation between valuation role and incentive role of accounting earnings. Second, the model shows that value role is positively related with incentive role by the covariance of marginal earning and marginal true value. Third, empirical test shows that, there’s a positive correlation between valuation role and incentive role of accounting earings. This conclusion exists in many robust tests and considering the effects of executive shareholdings and stock option.The main contribution of my dissertation is studying the correlaton between valuation role and incentive role of acconting information based on an analytical model which introducing two common assumptions:the manager is risk-averse and he has some private information. Also I empirically prove my hypothesis based on Chinese stock market.I hope my research can provide a new viewpoint to the study of accounting information; can be helpful to the investors who concern the valuation role of accounting information and the sharesholers who concern the incentive role;I also hope the it is useful to some regulators.