Heterogeneity Of Objectives?Executive Incentive And Earnings Management

The separation of ownership and management in modern enterprise system has caused the principal-agent problem.In order to alleviate the contradiction between shareholders and management,incentive contract can make the interests of shareholders and management converge,encourage managers to work hard to produce and operate,improve the value of the company,and increase shareholders' wealth.But how to design an effective incentive contract is a widespread concern in practice and academia.Generally speaking,there are two forms of executive incentive: one is explicit incentive represented by monetary compensation and equity incentive,the other is implicit incentive represented by perks and promotion.This paper takes state-owned enterprises(SOEs)as the research object.In order to highlight the research focus and ensure the data scale,the executive incentive in this paper mainly consider monetary compensation and promotion incentives.In the past,whether on monetary compensation or promotion incentives,the basic criterion of its effectiveness is to improve the financial performance of enterprises and maximize the value of enterprises.This is basically in line with the business objectives of the enterprise.In addition to the economic goal of profitability,the SOEs of our country should also undertake the multiple political and social goals of the government,such as obeying the strategic planning of national economic development,macro-control,employment and maintaining social stability,all these will weaken the goal of maximizing enterprise value,and then reduce the importance of performance indicators in executive incentives of SOEs,resulting in poor correlation of executive pay-performance sensitivity.Although all SOEs hold or participate in state-owned capital,there are great differences in their scale,ownership structure,governance structure,areas of involvement,geographical location and economic status.Although SOEs undertake non-economic goals such as political and social goals,not every state-owned enterprise undertakes all non-economic goals,not every state-owned enterprise undertakes all non-economic goals with the same proportion.Although they are all SOEs,there are also differences in the situation of undertaking non-economic goals,which also affects the effectiveness of executive incentive contracts.For a long time,well-designed executive incentive contracts have been considered as one of the main mechanisms to achieve the compatibility of managers' and shareholders' goals,which can motivate managers to work hard and improve corporate performance.Watts&Zimmerman(1978)point out,performance-based compensation contracts are likely to induce executives to implement opportunistic earnings management,manipulate accounting performance to obtain the best private benefits,and then reduce the effectiveness of performance-based compensation contracts to suppress agency problems.The reason why executives manipulate earnings for earnings management is that their personal interests such as stock options,monetary compensation,political promotion are all linked to the financial performance of enterprises,which is in line with the institutional background and micro-environment of foreign countries.However,the relationship between executive incentive and performance is complex because SOEs in China have multiple objectives,so the impact on executive behavior may also be different.Business objectives constitute the basis of executive incentive contracts,that is,incentive objectives.The criterion to measure the effectiveness of executive incentives should be whether incentives can motivate executives to achieve business objectives.The SOEs in our country undertake multiple objectives.Besides improving the financial performance of enterprises,the operational objectives also include local economic growth,employment promotion,social stability and so on.Because there are differences in incentive objectives,there are differences in measurement criteria of executive incentive effectiveness,and there are differences in evaluation indicators of executive incentive effectiveness,so there should be differences in earnings management activities that manipulate financial performance indicators.Previous scholars have also paid attention to the multi-task objectives of SOEs and their impact on executive incentive effect(Liu,Xiao,2015),however,there is no clear definition of whether different SOEs have different emphases on their business objectives and what the specific business objectives of different SOEs are.On November 12,2013,the Third Plenary Session of the Eighteenth Central Committee promulgated the Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning the Comprehensive Deepening of Reform.In 2015,the Central Committee of the Communist Party of China promulgated the Guiding Opinions on Deepening the Reform of SOEs.The two documents clearly put forward the opinions on the classification of SOEs and divide SOEs into three categories: Public-welfare category,Business1(Special-function category)and Business2(competitive category).Different types of state-owned enterprises have great differences in strategic positioning,operational objectives and ownership structure,which will inevitably affect the structure and content of compensation contracts,and also affect the effectiveness of compensation contracts,providing an opportunity for us to study the effectiveness of compensation contracts within the framework of classification of SOEs.In September 2016,State-owned Assets Supervision and Administration Commission and the Ministry of Finance jointly issued the Implementation Plan for Improving the Functional Classification Assessment of Central Enterprises,clarified the policy for the classification of SOEs.In December 2016,State-owned Assets Supervision and Administration Commission issued the Measures for Assessing the Operating Performance of the Leaders of Central Enterprises.According to the functional orientation and strategic position of SOEs,different assessment indicators are set for different types of SOEs' executives,which provide operational guidance for the classification and hierarchical management of executive compensation system.With the classification of SOEs as the research perspective,based on the data of listed SOEs during the period from 2003 to 2017,this paper empirically tests the validity and economic consequences of the incentive contract for SOEs executives.The main problems and main findings of this paper are as follows:Firstly,based on heterogeneity of Incentive objectives,we test the differences and mechanism of action of pay-performance sensitivity between different types of SOEs.At first,pay-performance sensitivity is used to measure the validity of compensation contract and to verify the difference of pay-performance sensitivity among different types of state-owned enterprises.The empirical results show that Public-welfare category has weaker compensation performance sensitivity than competitive category.Then,we test the effect of heterogeneous incentive objectives on the effectiveness of compensation contracts.The empirical results show that public welfare state-owned enterprises reduce their pay-performance sensitivity by implementing non-economic objectives(redundant employees and over-investment).Secondly,we examine the driving factors of promotion incentives for executives in different categories of state-owned enterprises.Based on the classification of SOEs,this paper studies the impact of financial performance and undertaking non-economic goals on the promotion and demotion of executives by using paired sample method and taking the invariability of executives as a benchmark.The results show that overall,financial performance and social responsibility are positively correlated with executive promotion,but the promotion of public welfare SOEs is positively correlated with non-economic goals,while the promotion of Business SOEs is positively correlated with financial performance.The financial performance is negatively correlated with executive demotion,and there is no difference between different types of SOEs.The demotion of senior managers in public welfare SOEs is negatively related to the undertaking of non-economic objectives,while that in Business SOEs is not related to the undertaking of non-economic objectives.Thirdly,we examine the behavioral differences of executives in different categories of SOEs.Through the research of the first two parts,it is found that,based on the heterogeneity of incentive objectives,different types of SOEs have different compensation contracts,and the application of incentive measures has some emphasis.The executives of public welfare SOEs pay more attention to promotion incentives and are more likely to achieve the goal of political promotion by undertaking non-economic goals.Executives of Business SOEs pay more attention to monetary compensation because they are more likely to achieve their goals by improving their performance because of the internal and external market constraints.Based on the above findings,this part also takes accrued earnings management and real earnings management as research objects,and comprehensively examines the impact of management incentives on earnings management behavior from the perspective of classification of SOEs.The empirical results show that,in public welfare SOEs,monetary compensation and promotion incentives will not trigger executives' accrued earnings management behavior,in Business SOEs,monetary compensation and promotion incentives can lead to managers' accrued earnings management behavior.The main difference between them is that the pay-performance sensitivity of public welfare SOEs is worse than that of Business SOEs,and the promotion of senior managers of public welfare SOEs is not related to financial performance.At the same time,the results also show that,in public welfare SOEs,monetary compensation has no inhibitory effect on real earnings management behavior,in commercial state-owned enterprises,monetary compensation can restrain real earnings management behavior.Whatever public SOEs enterprises or Business SOEs,promotion incentives will lead to real earnings management behavior,but the promotion of public welfare SOEs will lead to a higher degree of real earnings management.The main innovations of this paper are as follows:Firstly,this paper quantitatively studies the influence of the classification reform of e SOEs on the structure and content of executive incentive contracts.Different types of SOEs,because of their different functional orientation and operational objectives,are bound to have differences in the supervision mechanism,assessment and compensation contract design.Previous studies only qualitatively put forward ideas and suggestions on classified governance,but did not make relevant tests and analysis on classified governance from a quantitative point of view.At the same time,the existing literature research on executive compensation contract does not consider the impact of SOEs' categories,nor does it take into account the difference of incentive effect and executives' behavior caused by the heterogeneity of incentive objectives of different types of SOEs.Based on the perspective of classified governance,this paper quantitatively analyses the impact of heterogeneity of incentive objectives on the structure,content and validity of compensation contracts.Through empirical test,this paper finds that different types of SOEs have different pay-performance sensitivity,different types of SOEs have different promotion incentive performance sensitivity,and different types of SOEs have different accrued earnings management and real earnings management,which is the innovation and contribution of this paper.Secondly,it enriches the relevant literature on monetary compensation and promotion incentives.Most of the existing literature on the monetary compensation of executives in SOEs has been studied from the principal-agent theory,optimal contract theory,managerial rights theory,compensation control,compensation and multiple operating objectives of SOEs and various incentives.Based on the unique perspective of the classification of SOEs,this paper explores the structure,content and validity of executive compensation contracts,and examines the differences in executive behavior,enriching the literature on executive compensation contracts.For the research of executive promotion,it mainly studies the influencing factors,execution effect and economic consequences of executive promotion,among which the influencing factors of executive promotion is one of the most concerned topics.Studies at home and abroad have shown that factors such as financial performance,personal identity,location and marketization degree of enterprises can affect the promotion of senior managers.However,few studies focus on the heterogeneity of incentive objectives and analyze the driving factors for the promotion of senior managers in different SOEs from the perspective of internal differences.This paper finds that the promotion of executives in public welfare SOEs is only positively related to undertaking non-economic goals,while the promotion of executives in business SOEs is only positively related to financial performance.Financial performance is negatively correlated with the demotion of senior managers,and there is no difference among all kinds of SOEs.The demotion of senior managers in public welfare SOEs is negatively related to the undertaking of non-economic objectives,while that in business SOEs is not related to the undertaking of non-economic objectives.The findings of this paper enrich the relevant literature on promotion incentives.Thirdly,it enriches the relevant literature of earnings management.At first,this paper examines the impact of two executive incentives on earnings management,including explicit incentive monetary compensation and implicit incentive executive promotion,and examines the impact of the interaction between monetary compensation and executive promotion on earnings management,supplementing the existing literature which only studies the impact of single executive compensation incentive on earnings management in isolation.Then,from the perspective of classification of SOEs,this paper examines the differences between executive incentives and earnings management in different categories of SOEs.At last,this paper takes accrued earnings management and real earnings management as research objects to examine the relationship between executive incentives and earnings management.The characteristics of accrued earnings management and real earnings management also determine the differences between different types of managers' incentives and different types of earnings management.Based on the perspective of classification of SOEs,this paper explores the differences and mechanisms of pay performance sensitivity among different types of SOEs,analyses the driving factors and incentive effects of promotion incentives for different types of SOEs,tests the differences of the influence of different executive incentives on executive behavior and the regulation of the interaction effect of incentives on executive behavior,provides empirical evidence for the reform of classification of SOEs,provides a reference for the improvement of the incentive mechanism of state-owned enterprises and the design of incentive contracts.