Study On Relationship Between Executive Compensation And Accounting Conservatism

Accounting conservatism is one important characteristic of accounting infor mation quality, it plays a significant role in relieving principal-agent conflict an d reducing agency cost. The promulgation of 2006 new enterprise accounting s tandard further emphasizes the importance of accounting conservatism principle. Also, owing to the influence of executive sky-high salary, Senior Executive C ompensation which is one effective means of relieving principal-agent question have gotten more and more attention. Therefore, as two means to alleviate prin cipal-agent conflict and reduce agency cost, the relationship between them have gotten more and more attention by researchers. However, researchers haven’t got an unified result. Some studies indicate they’re positive correlation, and oth ers think they’re negative correlation. So, the relationship between accounting c onservatism and executive compensation is less clear. Moreover, most of the st udies are based on hypotheses-rational agents, not take irrational factors into ac count. But, in recent years, with the rise of behavioral finance, to make up for shortage of rational people hypothesis, explain the phenomenon that traditional can not do. Therefore, be based on the behavioral finance, this paper attempt to study the relationship between accounting conservatism and executive comp ensation from irrational factor——overconfidence perspective.Methods used in this paper are theoretical analysis and empirical study. In theoretical part:firstly, it reviews and summarizes the literatures about accou nting conservatism and overconfidence, including the existence of accounting c onservatism, the measure of accounting conservatism and the economic conseq uence of accounting conservatism, also including the performance, the measure and the consequence of overconfidence; secondly, theoretical analysis is base d on the literature above, analyze that whether executive is overconfidence or not will influence the relationship between executive compensation and accou nting conservatism. In empirical study part:firstly, puts sample into overconfid ence group and non-overconfidence group by using managerial ownership; sec ondly, takes Khan-Watts model to calculate listed companies’accounting conse rvatism index; Thirdly,on the basis of regression of total sample、overconfide nee group and non-overconfidence group respectively to research overconfidenc e how to influence the relationship between executive compensation and accou nting conservatism.Finally, the conclusions from this paper are as follows:less than 20% of managers of Chinese listed companies are overconfidence; for non-overconfide nee managers, their salary has positive relationship with accounting conservatis m; for overconfidence managers, their salary has negative relationship with ac counting conservatism; no matter the managers is overconfidence or not, mana gerial ownership has nonlinear relationship with accounting conservatism.