| Nowadays, the proprietary right of an enterprise is separated from its management. Executive compensation incentive and external audit are very important corporate governance mechanisms. Incentive for property managers can alleviate the agency conflict, compel managers’interests approaching to the shareholders’, thus it can reduce agency cost and improve the enterprise’s value. However, due to its inherent incompleteness, it will not only increase incentive effects, but also increase agency conflicts in the process of develop and perform the executive compensation contract. On the other hand, as the enterprise’s external guarantee and supervision mechanism, high-quality external audit can alleviate the agency conflict, and protect the interests of shareholders and others, which improve the value to the greatest extent. This paper analyses the influence of executive compensation of Chinese listed companies to the demand of external audit. It is significant to perfecting executive compensation mechanism of listed companies, and promoting the sustainable and healthy development of listed companies, and providing theoretical basis to perfect auditing standards and audit market supervision.This paper first uses normative research method. First of all, it defines the concepts of executive compensation and demand of external audit. Executive compensation is the direct and the indirect income which executives obtain, when they make the contribution for the enterprise. Executive compensation mainly has three forms:basic salary, short-term risk income and long-term risk income. This paper uses top three totals executive compensation instead of basic salary and short-term risk income; and uses managerial ownership instead of long-term risk income. The demand of external audit is the will of enterprises purchase external audit services or products. In this paper, the demand of external audit is on the condition of voluntary audit, by employing international "Big Four" or national "Top Ten" accounting firms to instead of demand of high-quality audit. Secondly, the paper reviews the related literatures and divides into two categories:audit demand and agency problems of shareholders and executives; audit demand and agency problems of large shareholders and minority shareholders. In the existing literature, foreign literatures about these two parts are more fully, while the domestic literatures are more about the latter, relatively fewer about the former. Most foreign literatures believe that the accounting contract compensation has a positive influence on the demand of audit, while managerial ownership has a negative impact. However, in China, Li Minghui(2006) and Xiao Zuoping(2006) analysed the effect of managerial ownership on audit quality, they got different conclusions. On the other hand, the domestic literatures all believe that the company has low demand of audit quality when the controlling shareholder is state-owned shares; high-quality audit can improve the enterprise’s market value, and positively affect the information content of accounting earnings. Most domestic studies indicate that the largest shareholder has a range effect on the demand of audit, their relationship is non-linear.Thirdly, this paper summarizes some present characteristics of executive compensation of listed companies and the demand of external audit. Nowadays, executive compensation mainly has the following features:executive compensation has an overall growing trend; the correlation with enterprise performance becomes stronger; obvious industrial and regional differences; the salary gap of executives between state-owned enterprises and private enterprises becomes closer; "Zero pay" phenomenon is still serious and disclosure condition is not optimistic. In addition, the paper analyses the demand of external audit of listed companies, from three aspects respectively, which are supervision demand, signal demand and insurance demand. With the deepening of the reform of non-tradable shares in China, the demand of high-quality audit of listed companies has gradually strengthened. Meanwhile, with the rapid development of the international accounting firms and some large domestic accounting firms, which dominate the audit market, they already have the ability to provide high-quality audit services and meet this growing demand.Fourthly, by using incomplete contract theory, this paper clarifies the complementary relationship between executive compensation and demand of external audit. Because of the uncertainty of the entrusted rights, information asymmetry and human’s limited reason, executive compensation contract is incomplete, and a series of agency conflicts will be produced in the formulation and implementation of executive compensation contract. These can reduce the efficiency of compensation contract. Compensation contract and audit contract belong to different economic game domains, and they are complementary systems. With strengthening government regulation and improving credibility mechanisms of the audit market, it can improve the efficiency of the audit contract. Both audit contract and compensation contract could form an efficient mechanism. According to the theoretical analysis, this paper puts forward H1:after controlling other variables, executive cash compensation has a positive influence on demand of external audit. In addition, based on the analysis of convergence of interest hypothesis and entrenchment hypothesis, this paper puts forward H2:after controlling other variables, managerial ownership has a negative influence on demand of external audit.Then, by using empirical research method, this paper draws data samples of security market from 2007 to 2009, uses employing international "Big Four" or national "Top Ten" accounting firms to represent demand of high-quality audit, uses top three totals executive compensation’s natural logarithm to represent executive cash compensation, and adds managerial ownership ratio and its square as the explanatory variables at the same time. In addition, after controlling the company’s asset scale, liability ratio, share ratio of the largest shareholder and its square, this paper builds a Logistic regression model, and tests the whole sample and sub-sample to analyse the influence of executive compensation to the demand of external audit. Then replace executive cash compensation variables twice, in order to improve the robustness of the results.At last, the paper gets the conclusion through the empirical analysis: executive cash compensation has a positive influence on demand of high-quality audit, that is, the higher executive compensation, the bigger demand of external audit, so H1 is true. On the other hand, managerial ownership ratio has a positive influence on demand of high-quality audit, but its square has a negative influence on demand of high-quality audit. So, the relationship of demand of high-quality audit and managerial ownership is a significant inverted U-shaped curve. In the whole sample, the inflection point is 33.6%, which is when managerial ownership ratio belows 33.6%, managerial ownership has a positive influence on demand of high-quality audit; and when managerial ownership ratio beyonds 33.6%, managerial ownership has a negative influence on demand of high-quality audit. So the result is, when managerial ownership ratio belows 33.6%, the higher managerial ownership level, the bigger demand of external audit; And when managerial ownership ratio beyonds 33.6%, the higher managerial ownership level, the smaller demand of external audit. So, H2 is not true.Finally, based on the results of above study, this paper proposes some policy recommendations. It is necessary to improve the audit of listed companies’ executive compensation, and perfect the restriction and supervision mechanisms. It is important to improve professional managers’market, and further improve the managerial ownership incentive mechanism. It is important to consummate the fairness rules of executive compensation and disclosure. Companies need to assess the current executive compensation; increase the degree of association between pay level and enterprise performance; focus on rationalization of compensation structure; effectively control risks and enhance market comparison. It is important to develop and improve related auditing standards and credibility mechanisms of the audit market.The main contributions of this paper can be summarized as the following two points:1、In this paper, executive compensation have being studied from a new perspective of audit demand, which is about the relationship of demand of external audit and agency conflicts of shareholders and managers. This paper uses normative research method to analyse the institutional complementary relationship between executive compensation and demand of external audit, further uses empirical research method to analyse their relationship and gets the meaningful conclusions. The domestic literature is relatively few on this area, this paper enriches it.2、This paper improves previous models, which considering executive cash compensation and managerial ownership ratio at the same time, empirically tests the influence of executive compensation to the demand of external audit. Thus concluded, the higher executive cash compensation, the bigger demand of external audit; the relationship of demand of external audit and managerial ownership is a significant inverted U-shaped curve. According to the conclusions, this paper proposes suggestions about strengthening the executive compensation audit, improving the managerial ownership incentive mechanism, consummating the disclosure and regulating the audit market. Moreover, this paper provides a new way of optimizing the executive compensation system. |
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