Political Connection, Executive Compensation And Financial Restatement

In recent years, financial restatement always happened, which has disrupted the capital market severely and impacted the investors’ confidence. Financial restatement means that the quality of corporate financial reporting is low, also reflects the distortion of accounting information. How to prevent and control the financial restatement effectively is of great significance to the healthy development of capital market. At the same time, the “relationship” culture has rooted deeply in our country, and the political connection as a protection mechanism of the enterprises, which means the company existing illegal disclosure can obtain more protection and accommodation of the government. Under this background, based on China’s A-share listed companies from2012 to 2014 in Shanghai and Shenzhen as sample, we try to examine the effect of executive compensation to financial restatement, then through the association between executive compensation and political connection to inspect the influence of financial restatement, and further to distinguish the nature of property right to do the grouped regression.By applying the basic theory of management, accounting and politics, we investigate the impacts of executive compensation and political connection to financial restatement, its main contribution is about:(1) In the perspective of executive compensation incentive, we study the influence of the executive compensation to financial restatement, and expand the research scope of financial restatement.(2)Examine the function of executive political connection in affecting the relationship between executive compensation and financial restatement, which adds to the political connection research literature and is easy to understand the role of political connection.(3) Provide efficient evidence of the inefficiency of political connection and government as ultimate controllers, also expend the literature that government is “the hand of plunder”.The result shows that:(1) Executive compensation of listed companies in our country is negatively related to the financial restatements, which means the high executive pay can help them to realize more senses of duty, reduce the motivation of financial restatement, and improve the quality of accounting information.(2) The political connection can weaken executive compensation to the influence of financialrestatement, which means with political associated enterprises will lead to the occurrence of financial restatements.(3) To distinguish the nature of property right, we can find the weakening effect of political connection of state-owned enterprises is more obvious than non-state enterprises.Implications of this paper are: Firstly, improve the executive compensation system,and promote the diversification of incentives. Due to the plan of stock ownership incentive in our country is late, there are less executives hold shares of listed companies.Thus, enterprises should adopt a variety of ways to executive compensation incentive,and reduce the probability of financial restatements. Secondly, appropriate to reduce government involvement and break the rent-seeking model. Political connection as the "umbrella" of the enterprise, make the financial restatements are difficult to be found.Therefore, enterprises should be appropriate to reduce the government activity in the market, break the mode of government rent-setting and corporate rent-seeking, in order to reduce the incidence of financial restatements. Thirdly, improve the transparency of information disclosure and strengthen supervision. In addition to strengthen the internal supervision of enterprise, the government, CSRC and industry organizations are also essential. The improvement of enterprise information transparency can reduce the asymmetry of information, thus reduce the occurrence of financial restatements and protect the interests of investors. Finally, accelerate reform of the mixed system of state-owned enterprises. Because the weakening effect of political connection of state-owned enterprises is more obvious than non-state enterprises, reflecting that the disadvantages of state-owned enterprises is greater than non-state enterprises, which fits the reform of state-owned enterprises. Now mixed ownership reform is the main direction. Its purpose is not to mixing and mixing, but to promote state-owned enterprises to achieve industrial upgrading, optimize industrial structure and improve business performance, so as to improve the quality of accounting information.