The Complementary Study Between Executives Incentive And Audit Based On Incomplete Contracts

This article used the methods of normal research and specific research. First, based on the Principal-agent theory of our enterprises, incentive contract between the entrust and the agent is infect. The incentive contract is mean the dominate incentive for executives. One of the measures for making up the infect is introducing external audit system, also, this is the background of this article. Then from the aspect of contract, incomplete of incentive contract and audit contract are analyzed and concluded that the incentive contract and audit contract are complementary. In other words , the audit contract could effective make up the problems which caused by the incentive contract and optimized the relationship of the Principal-agent. This is a important conclusion for this article. Based on the incomplete contract theory , a three participants contract model are established and analysis the conclusions that when the board of directors intensify the investigation of violations from the executives and eternal audit, the violating motivation of the executives and eternal audit could be reduced; when the executives could get more violation benefit, the violating motivation of the executives is enhanced; when conspiracy between the executives and the audit could get more benefit, the external audit have a high motivation to match the manager violation behaved, but the violation motivation of executives could be inhibited, because the executives would not get the corresponding risk return; when the board of directors get more extreme benefit, on the other side, if the board of directors do not have a strictly investigation and will loss more benefit, the motivation of strictly investigation will be enhanced. But the motivation of strictly investigation is related to the cost of strictly investigation, so the board of directors would find a balance between the motivation and the cost. In the final chapter, this article selected book value, operating expense ratio, financial leverage and the external audit which employed from listed companies of Beijing and Tianjin between 2007 and 2009 to estimate a model and do a Logistic regression analysis. Through specific analyzing, the conclusions are high external audit quality is related to the incentive compensation; high quality audit can effectively reduce the opportunistic behavior of executives, such as abusing the operating express. The theory model and the complementary between incentive contract and audit contract are proved.