An Empirical Research On The Relationship Between CEO Compensation And Earning Persistence

Manager's compensation is the topic talking about by investor and scholars. In the last few years, many companies changed the mechanism in order to improve the outputs and reduce the agent cost. Overseas scholars found that manager may run up the performance to maximize his own benefit if the company chooses income to design the compensation of manager, then this will not reduced the agent cost through letting the manager owns the residual ownership. Further research found the moral hazard can be reduced if the committees pay attention to the quality of the income and adjust the compensation hereby.In this dissertation, we choose the listed companies as the sample to investigate the relationship between manager's compensation and earning persistence. Because the government control company's government mechanism is different from other companies, I divided the sample into two more small samples by the nature of the holding company to study the relationship between manager's compensation and earning persistence separately. In this paper, I define there types compensation: cash compensation, compensation based on equity and total compensation in order to test whether the effect will be different if the structure of compensation is different. But cash compensation is more important in this paper. Further we will test weather the manager's compensation will more relay on the earning persistence if the manager will retire.The empirical results reveal that both the natural of the nature of the holding company and the age of the manager affect the relationship between manager's compensation and earning persistence. We found the cash compensation notable relationship between stock return and accounting income if the manager of the government control company is 59 old or older, the quality more tinpot the lower relativity between cash compensation and stock return; other manager's cash compensation is correlative to stock return accounting income and cash flow of operation, but the relation between the cash compensation and earning persistence is not notable; In the company which not controlled by government the compensation is related to the cash flow of operation, but not very notable, then the income quality more tinpot the relativity more notable. In both samples the compensation based equity is only relative to stock return. Moreover the control variable firm size is not relative to cash compensation but relative to the compensation based on equity, the larger the company is the more stock the manager own.In the sample of government controlled company and the age of manager older than 59, the result of the relationship between compensation and earning persistence adverse to the suppose. It show that manage who is will retired can control his own compensation to maximize his benefits. The manage will not retired, earning persistence is not considered in designing the compensation. In the other sample, earning persistence is relative to manager's compensation, but it is not affected by the age of the manager.Based this result we suggest that we should improve the corporate governance of the government controlled company, the company should distinguish the earning quality, if lots earning will not contain to the last year, and the compensation should relative to the outstanding achievement which is not controlled by manager. Moreover the incentive mechanism should be build up in the company not controlled by government to improve the compensation mechanism.There also some limitations in this dissertation:The model is designed simply in line; both the tradeoff between compensation and risk and the tradeoff between compensation and supervise are not considered. This issue should be covered in further research.