Accounting Conservatism And Excess Executive Compensation

In recent years, the executive compensation issues draw the great attention of all the community. In returns for company executives’work, the number of executive compensation should reflect the level of effort of the executives and their contribution to the company. Therefore, in order to motivate executives to work hard and avoid them to get excess compensation by their opportunistic behaviors, more and more companies begin to base the executives’compensation on the company performance. At this point, the level of the quality of accounting information reflecting the performance of the company is particularly important.Currently, many studies have confirmed that accounting conservatism can avoid the overestimation of the performance of the company, and thus improve the quality of accounting information. In other words, the company values more accounting conservatism,the less possibility of executives by exaggerating the company’s performance to get excess compensation.In this paper, it is through the research of the relationship between accounting conservatism and excess executive compensation, in order to verify that the company focus on accounting conservatism can inhibit excess executive compensation.According to the view of the principal-agent theory and the theory of optimal contract, the design that executive compensation linked to performance in executive compensation incentive contract is conducive to the implementation of effective incentive and restraint on executive, which makes their decision-making behaviors the maximum extent consistent with the goal of maximizing shareholder wealth; However, based on the management of power theory point of view, in the context of executive compensation linked to performance, company executives consider themselves have the limited terms and limited liabilities objective reality may be more will use their power to implement opportunistic behavior through the manipulation of the results to get excess compensation and other ways to add to their additional revenue. Therefore, in order to protect their own long-term interests from losses, on the one hand,shareholders and creditors want to executive compensation linked to performance, to achieve the purpose to motivate executives to work hard; On the other hand, they also requires management to pay more attention to the accounting recognition of accounting conservatism to improve the quality of the information reflecting the performance of the company. This is the less possibility of executives by exaggerating the company’s performance to get excess compensation.On the basis of the above theoretical, first, whether the strengthening of accounting conservatism helps to reduce excess executive compensation question has carried on the empirical test in this paper. Secondly, when the executive compensation with company performance linked to varying degrees, accounting conservatism strengthen inhibition achieved excess executive pay will vary, then we analyzed; Last, there are many differences in the internal governance mechanisms between state-owned enterprises and non-state-owned enterprises, in this case, accounting conservatism inhibition of excess executive compensation is also different between the two types of enterprises, which is the third aspect of this study.In two main variables accounting conservatism and excessive executive compensation metrics, first, this paper learns from Iwasaki et al.(2012) measure of excess executive compensation, use the data of the total remuneration of executives of listed companies in top three to estimate; And then, this paper learns from the the Basu model of measure of accounting conservatism method to measure and judge the soundness of the sample companies, then by introducing control variables to build this paper’s main regression model.The conclusions of this study are divided into the following three points:First, in the full sample, accounting conservatism strengthen made a significant inhibition of excess executive compensation, and there is a significant negative correlation between accounting conservatism and excess executive compensation.Second, the higher the degree of executive compensation and company performance-related, accounting conservatism strengthen more pronounced inhibition of excess executive compensation, and there is a more significant negative correlation between accounting conservatism and excess executive compensation.Third, compared with non-state-owned enterprises, there is a more significant negative correlation between accounting conservatism and excess executive compensation in state-owned enterprises, and in order to reduce excess executive compensation based on exaggerated the performance of the company, state-owned enterprises should pay more attention to accounting conservatism.The main contributions of this article are the following two aspects:First, this is the first use of the data of listed companies in China, empirical research on the relationship between accounting conservatism and excess executive compensation, enrichs the content of the study on the economic consequences of accounting conservatism in China, expands the research perspective on the disincentive for excess executive compensation,In recent years, domestic scholars to extract excess executive compensation learn from Core et al (1999,2008) estimation method, such as, Wu Yuhui, and Wu Shinong (2010) put ROA into the estimate of the expected executive compensation. This article by drawing Iwasaki et al.(2012) of excess executive compensation metrics, from the perspective of last year’s executive compensation and the average pay of industry executives estimated the expected executive compensation in the year, and then according to the actual executive compensation extracted the "excess" of the executive compensation. This metric overcomes the shortcomings of the previous studies, providing a new implementation method for the direct study of the relationship between accounting conservatism and excess executive compensation.Second, This paper deeply analyzes the relationship between accounting conservatism and excess executive compensation when the company’s performance on executive incentive intensity is different (that is, the executive compensation and corporate performance correlation), as well as when the company property background is not the same. From multiple perspectives, for our country government regulators continue to emphasize enterprise’s accounting should pay attention to the use of the prudence principle provides empirical support, and proves that the role of accounting conservatism in the Chinese enterprises’(SOEs) management compensation contract should not be overlooked. The main limitations of this research are the following three aspects:First, it is the limitation of the sample selection. Due to the restriction of the objective conditions and the specific research conditions in this paper, the sample of this article is limited to the Shanghai and Shenzhen two city a-share main board listed companies in512, a total of4597observations, the number of sample companies is not much. Therefore, if the conclusions of this study are applicable for companies listed in other special forum and screening samples for this article deleted, also need to be further explored.Second, it is the limitation of the measure of the way of excess executive compensation. This article for excess executive compensation measure is only based on cash compensation for estimate. If companies focus on accounting conservatism will help to improve the effectiveness of the long-term incentive compensation, still need to be examined, this study did not involve.Third, it is the limitation of the set of the control variable. Due to excess executive compensation is affected by many factors, in this paper, the control variables are taken into account in the research process is likely to be not comprehensive enough, which causes that there are some limitations in the set of the control variables in this paper, but limited my time and ability, the perfect setting for the control variables, later in depth.