An Empirical Research On The Relationship Between Earnings Management And Executive Compensation

Since the nineties from the twentieth century, the rapid development of China’s securities market, the issue of earnings management of listed companies has drawn great attention, many domestic scholars have started their systemic study. However, most of these studies are based on the consistency of management’s own interests and business interests, but studies that managers drive the earnings management to be based on self-interest are rare. However, in the separation of ownership of the modern enterprise system, the conflict of interest between managers and owners is also existed.In the principal-agent relationship, the "individual rationality and collective non-rational" of the dispersed shareholders, which causes the inadequate supervision to the managers who pursue maximum of personal interests. It will inevitably lead to managers occupy the interests of shareholders and damage the. company’s operating efficiency. Therefore, it is necessary to use corporate governance to incentive and restrict managers, to maximize the rights of shareholders. Compensation contracts are agreements to make composition and terms of managers’compensation, to a certain extent, which is consistent with their interests and could reduce agency costs. However, due to information asymmetry, it is difficult to establish an effective compensation contract, therefore, shareholders can only design manager salary contract based on the company’s operating performance. Because of the hidden nature of earnings management, on the base of accounting performance pay-system may be difficult to achieve the desired the results, managers are likely to adjust accounting income through earnings management in order to increase their compensation.Purpose of this study is that, analysis of the correlation between earnings management and executive compensation in theory; empirical studies if the managers of listed companies have an incentive to improve themselves compensation through earnings management on the perspective of executive tenure. The empirical research mainly includes the following three aspects:First, whether the long-term or short-term executives even more inclined to improve their own remuneration through earnings management. It is expected shorter term, more earnings management executives obviously; Second, leaving the previous year, executives are more inclined to improve their remuneration through earnings management; Third, whether holding stock of executives can effectively reduce the earnings management behavior. This study will help to further improve the pay system of the Listed Companies in China.Based on the related theories, this article includes the following sections:ChapterⅠ:Introduction. This chapter first describes the research background and significance, this study put forward ideas and logical structure, selected tools of theoretical analysis and research methods.ChapterⅡ:Literature Review. This chapter mainly reviews and evaluation of studies from two aspects:the earnings management and executive compensation, executive tenure, earnings management and executive compensation.ChapterⅢ:Theoretical analysis. First defining the basic concepts involved in this paper, and then introducing the principal-agent theory, contract theory and management of power theory in detail.ChapterⅣ:Empirical research on the earnings management and executive compensation. This is the core of the article. It includes research hypotheses, the variable selection and description, modeling and data sources and sample selection and so on. Then, according to research hypotheses, definition and description of variables, this regression model was constructed, and regression analysis. This choice CSMAR listed companies in China in the database between 2007-2009, the Shanghai and Shenzhen-listed companies as primary samples, obtained the final 2051 sample data, and statistical purposes the final data of the industry and the annual distribution.Based on logical analysis, the paper made the following four hypotheses: First hypothesis, there is pursuing highly paid executives to carry on earnings management, and earnings management and executive pay are positively related; Second hypothesis, the shorter term, the more executives tend to improve their returns through the earnings management; Third hypothesis, the leaving year, executives will increase the extent of earnings management, earnings management and executive pay are more significant positively correlation; Forth hypothesis, the case of managerial ownership, the earnings management and executive pay do not exist significant correlation, that managerial ownership to mitigate earnings management of listed companies.Empirical analysis of the relationship between earnings management and executives compensation, the aim of in-depth analysis for executives’extent of earnings management at different period. First, the samples were analyzed by descriptive statistical analysis of data. Secondly, we get multiple regression analysis of sample data. The results showed that:earnings management and executive pay is related; with the extend of the executives’tenure, its relevance is relatively weak; executives leaving the previous year, its relevance is more significant; In addition, in managerial ownership regression found no significant relationship between earnings management and executive pay. Finally, to ensure the reliability of conclusions, we conduct a sound test.ChapterⅤ:Research conclusions and policy recommendations. The main conclusions of this paper are the following aspects:First, on the whole, there is a significant positive correlation between earnings management and executive compensation in China’s listed companies. This shows that such as the bonus plan in developed countries, when the design of compensation contracts based on accounting earnings, the executives of listed companies have motivation to increase their own compensation, adjusted accounting income through earnings management; Second, executives in short term, the relationship is strong positive between the earnings management and executive pay, and as the extend of executive tenure, its relevance is relatively weak; Third, executives leaving the previous year, executives have more strong motivation to earnings management; Finally, because of management shareholding, there is not significant correlation between earnings management and executive pay, indicating that, in the implementation of incentive stock options of listed companies, the executives have not obvious motivation to increase their compensation through earnings management.The main contribution of this study are the following aspects:First, in-depth analysis of the agency problems based on the compensation contract, arising in the summary and sorting existing research, the first time study the correlation between executive pay and earnings management from the perspective of executive tenure. It enriches the study of this issue and has some theoretical significance; Second, through empirical research the intrinsic link among equity incentives, earnings management and executive compensation, help listed companies to develop more effective incentive contract; In addition, the regulation will also help regulators constraints earnings management of listed companies. It has important practical significance.This deficiency includes following aspects:First, this article only selected the relevant attributes of CEO as a substitute variables executive pay and tenure; Second,executives of listed companies is not only monetary compensation paid, but also non- monetary reward, but because of limited data availability, this paper only study the monetary compensation paid of executives;Third, we put forward the policy recommendations in the design of executive compensation contracts, but only a preliminary framework for the refinement of its content with the practical development.