Study On The Influence Of Compensation Regulation On Earnings Quality Of Listed Companies

Since 2009,compensation regulation has been a vital topic in corporate reforms of China.China’s GDP has maintained rapid growth in the past decade.With the development of the economy,the compensation of China’s corporate executives has increased rapidly,and the annual compensation of some executives has even shown explosive growth.The high salary,on one hand,confirmed the fast development of China’s economy,and on the other hand,it inevitably caused various social problems,such as salary comparison,"hanging upside down" pay for performance and so on,which aroused heated discussion on the rationality of compemsation.Therefore,the government issued a number of salary restrictions.In September 2009,China’s Ministry of Human Resources and Social Security and other departments issued compensation regulation.The Third Plenary Session of the 18 th Central Committee of CPC discussed some vital issues concerning deepening the reform in an all-round way.And the compensation of SOEs was listed as one of the seven reforms to “promote SOEs to improve the modern enterprise system”.In August 2014,General Secretary Xi Jinping made a 16-word guideline at the meeting of the leading group of deepening reform—“appropriate level,reasonable structure,standardized management and effective supervision”.Executives are the protagonists of enterprises,so how will the implementation of compensation regulation affect the company,and how will it affect its earnings? Can compensation regulation really achieve these goals(management standards,effective supervision)?In this paper,the quality of earnings is defined in three dimensions(earnings management,earnings conservatism,and earnings persistence),according to the source and quality of accounting information.Based on the analysis of the mechanism among these three dimensions,combining the differences in property rights and the role of management power,this paper carries out theoretical analysis and empirical research on these three questions.(1)Question 1: whether and how does compensation regulation affect earnings management? Under different types of earnings management,this paper proposes that executives will reduce the accrued earnings management and increase the real earnings management.In addition of that,this paper further analyzes and tests the influence of managerial power on the relationship between compensation regulation and earnings management.(2)Question 2: whether and how does compensation regulation affect earnings conservatism? On the basis of question 1,this paper analysizes the linkage between earnings management and earnings conservatism.The influence of compensation regulation on two types of earnings management further leads to the change of the earnings conservatism.Therefore this paper focuses on the relationship between compensation regulation and the two kinds of conservatism.Meanwhile,this research also considers the influence of property rights and managerial power.(3)Question 3: whether and how does compensation regulation affect earnings persistence? Based on the study of earning management in question 1 and the research of earning conservertism in question 2,this paper tries to analysize the correlation among the three characters of earnings quality—“earnings management,earning conservertism and earning persistence”.At the same time,managerial power has an effect on the realationship between compensation regulation and earning persistence.In view of these three questions,this paper firstly summarizes relevant literatures on earnings quality and salary inequality in order to eatablish theoretical basis for this topic.Secondly,this paper sorts out the development of compensation policy and analysizes the current situation about compensation of Chinese enterprises under the background of compensation regulation,so as to clearly explain the reasons,problems and economic consequences of the implementation of compensation regulation.Thirdly,based on data of China’s listed companies from 2010 to 2018,this paper conducts theoretical analysis and empirical test on earnings quality.Finally,based on the above analysis,the main conclusions are drawn and relevant policy suggestions are put forward.In general,the primary findings of this paper mainly include the following three aspects.Firstly,compensation regulation has an effect on earnings management.The findings are as follows:(1)The improvement of compensation regulation inhibits the accrual earnings management behavior of executives and induces the real earnings management behavior.(2)Compared with non-SOEs,compensation regulation has a more significant impact on earnings management of SOEs.Compared with local SOEs,compensation regulation has a more significant impact on earnings management of central SOEs.(3)Managerial power will further amplify the impact of compensation regulation on earnings management.(4)Accrual earnings management and real earnings management are not a simple substitute of each other or complementary to each other.Senior executives may adopt both two ways of earnings management according to the actual situation of the enterprise.Secondly,compensation regulation has an effect on earnings conservatism.The findings are as follows:(1)Compensation regulation is positively correlated with both the conditional and the unconditional earnings conservatism.(2)Property rights have an effect on the influence of relationship between compensation regulation and earnings conservertism.Compared with local SOEs,compensation regulation has a more significant positive effect on the earnings consevertism of central SOEs.(3)The influence of managerial power on different kinds of conservatism is completely opposite.On the one hand,managetial power helps to strengthen the positive correlation between compensation regulation and conditional conservatism.On the other hand,it will weaken the positive correlation between compensation regulation and unconditional conservatism.Thirdly,compensation regulation has an impact on earnings persistence.The findings are as follows:(1)Compensation regulation has a negative impact on the persistence of corporate earnings.Further analysis shows that compensation regulation can weaken both cash flow and accrual persistence.(2)Property rights have different effects on persistence.Compared with non-SOEs,compensation regulation has a more significant negative effect on the cash flow and accrual persistence of SOEs.Compared with local soes,compensation regulation also has a more significant negative effect on the cash flow and accrual persistence of central SOEs.(3)Managerial power will further enhance the negative correlation between compensation regulation and earnings persistence,as well as the negative correlation between compensation regulation and cash flow persistence(accrual persistence).The innovations of this paper lie in the following three aspects:Firstly,this paper expands the research scope of earnings quality and enriches the research on the influence of compensation regulation.The existing literature mainly focuses on the internal factors such as enterprise ownership structure,governance characteristics and management characteristics,as well as external factors such as external audit and market environment.A small number of studies focus on the impact of compensation regulation on earnings quality,and meanwhile,most of them rarely talk about more than two dimensions of earnings quality.This paper deeply studies the influence of compensation regulation on earnings quality.Based on this,the paper investigates the role of property rights and managerial power in the relationship.Secondly,this paper integrates the research of multiple dimensions of earnings quality.Based on accounting information supply combined with information quality,the paper forms an analysis framework of three dimensions of earnings quality.Existing literature merely involve the study of relationship between multi-dimensional earnings quality.This paper discusses the effect of compensation regulation on each specific indicators,and digs out the framework of "earnings management—earnings conservatism—earnings persistence".According to theoretical analysis,the paper verifies the interaction among the various dimensions,and reveals the new path of compensation regulation affecting earnings quality.Thirdly,this paper distinguishes the difference between the impact of compensation regulation on earnings quality between central and local SOEs.On the one hand,it is beneficial to deepen the understanding of the impact of compensation regulation policies.On the other hand,it is beneficial for local SOEs to implement compensation regulation in accordance with local conditions,rather than simply copying SOEs.Compensation regulation is actually the limitation for the dominant compensation of senior executives,while the motivation of pursuing implicit compensation induces the earnings decision-making behavior of senior executives.Compared with local SOEs,this influence is more significant in central SOEs.Due to the heterogeneity of property rights,compensation regulation policies need to be specifically formulated to improve its implementation.