Research On The Relationship Between Executive Compensation Regulation In SOE And Imformation Transparency

With the increasing intensity of world economic crisis, those greedy executives seem the only survivors from this crisis, especially compared with the sharply shrinking of investors' wealth. Around the world, government interference in executives'compensation has been growingly demanded by public.Linked to the reality in China, executives'compensation in SOE (state-owned enterprise) maintains a rapid growth rate (an average rate at above 20%).Among them, those who have abnormally high payment cause strong questioning and unsatisfactory from society. To achieve stability and appease public sentiment, government began to strengthen executives'compensation regulation since 2008.On the one hand, government set up the maximum compensation limit through legal ways; for example,2009, the ministry of finance documented executives' highest compensation in financial corporation should less than 2.8 million every year.An insider revealed:a general specification covering all the SOE is now in discussion and the compensation gap between executives and staff will be narrowed down to 10 or 12 times. On the other hand, government implies executives to cut their compensation by themselves. So, many executives reduced their compensation significantly one after another; unusual phenomenons such as "zero payment", "one-yuan payment" among executives emerge endlessly.Limit the compensation of executives, to some degree, narrowed the compensation gap between the rich and the poor.Contrast to cheering from society and media, some scholars worry about this policy effect. Chen Donghua ect. (2005) pointed out, with the cash compensation regulation, non-pecuniary compensation of SOE has an obvious rising trend, which is called "lose inside the regulation, compensate outside the regulation". The high nominal compensation is only "the tip of an iceberg" of those agency problems and the real serious problem is executives'control right benefit (such as complicated items of non-pecuniary consumption and corruption in SOE) which is hard to be supervised by public. Yang Ruilong(2008)also shared the view that the key point of limiting executives' compensation is to make it transparent and let compensation be linked to executives'performance.What's more, the government should limit executives' non-pecuniary consumption and disclose it. Thus, author believe that supervision of manager's control right benefit is the key point of supervising executives. Specifically, instead of disclosing executives'compensation mandatorily, the disclosure of the executives'control right benefit relies heavily on their voluntary disclosure and the auditors' opinions. So, executives have more power to manipulate these information.Compensation regulation discourage executives to break the initial balance of information and lower accounting information transparency. By this way, executives let their control right benefit beyond public's monitoring to compensate the cash compensation loss.From this perspectives, this thesis combined Wen Bingzhou, Yu Qingsong(2006)'s research fruit which classify psychological imbalance caused by compensation regulations into three levels.Base on this classification,author discusses their influence on information transparency respectively and futher probes feasibility of public monintoring executives'behavior by accounting information.The executives' manipulation of accounting information is not only depending on their own profit, but also on the intention and abilities of supervisors. The conclusion of this paper points out compensation regulation increase enterprises'agency costs when it lacks of other facilities and distorts the transparency of information. It means that compensation regulation is not conducive to protect the benefit of investors fundamentally. Specifically, for COE (central state-owned enterprises), because government strengthens the combination of compensation regulation and corruption governance, compensation regulation lessens executives'information rent but lack of effective supervision of earning management. Regulation results cause executives to distort their initial investment, decrease their working motivation and reduce earnings report which lead to budget slack. This phenomenon is usually called "conceal of profit" in SOE. For LOE (local state-owned enterprises), compensation regulation let local government have to reserve more information rent to encourage executives to report real earnings or more than real earnings. On the one hand, government reduces executives' compensation to comfort publict.On the other side, it is acquiesced for executives to reduce non-pecuniary compensation voluntary disclosure, choose worse auditor firms to lessen public supervision on their non-pecuniary compensation and corruption. Finally, executives change the "sunshine wages" to "implicit corruption".The only sufferers are those minority shareholders. The conclusion of this paper is that if we can'tt deepen reform process of performance evalution mechanism, compensation pricing mechanism and compensation contract disclosure mechanism etc fundamentally.;If we can't adjust the relationship between local government and their SOE and award minority stockholders special protection mechanism, the effect of compensation regulation would be "falls short of the reality."The arrangements of the thesis are as follows:Chapter one:Introduction. It summarizes the background, significance and innovation of this research. It also expounds the basic ideas and the overall framework of this thesis.Chapter two:First of all, this chapter introduces the meaning of compensation regulation. By comparing policies adopted in China and America, reviewing compensation regulation history in our country and summarizing the specificity and background of compensation regulation in China, author points out the main difference between China and America in compensation regulation is regulation objectives, measures, and means of implementation and managers' attitude to regulation. Second, author comprehensively summarizes and reviews information transparency measures in the existing literature.Based on previous researches and combined with my research purposes, this thesis establishes my own measures of transparency which include "qualities of earnings", "non-pencuiary compensation voluntary disclosure" and "audit quality". Author further clarifies the relationship between the three indexes.Finally, the thesis sums up the relevant factors influcing information transparency, specifically compensation contracts on information transparency. These factors will be needed for the following study.Chapter three:Author systematically analyzes the determinants of managers's normal compensation in China and other countries. The thesis measures government intervention degree on executive compensation of SOE through the gap between the predicted and actual compensation of managers.Basing on this means, the thesis also does the descriptive statistics of compensation regulation by nature of ownership, industry and region. Author finds the primary evidence and objective laws in various types of compensation regulation in SOE.Chapter four:This chapter connects whether compensation regulation exists with the extent of earnings management in SOE. Author also combines this research with the background of fiscal decentralization to analyze the differences of the information asymmetry, governance principles and alternative mechanism between central and local government how to affect their different earnings managemen behavior. Author explains the "hiding profit" behavior of COE (central state-owned enterprises) from the compensation regulation aspect. Furthermore, author compares the impact of two different compensation regulation means on earnings management by classified regression, and then provides suggestions to improve regulation means.Chapter five:Author connects compensation regulation degree with non-pecuniary compensation voluntary disclosure in SOE.Base on agency costs and property costs, author take superviser'incentive and managers'subjective evaluation into consideration to analyze compensation regulation how to affect two kinds of costs and further more how to affect non-pecuniary compensation voluntary disclosure.lt provides some suggestions to improve the current non-pecuniary compensation disclosure policyChapter six:This chapter connects compensation regulation degree with audit opinion and audit quality in SOE. From the impact of compensation regulation on audit opinion, author discusses whether the compensation regulation increases the potential agency costs. Further more, author discusses different auditor choice strategies adopted by COE (central government owned enterprise) and LOE (local government owned enterprise) to deal with agency cost. Finally, the author compares this conclusion with the classic agency theory to analyze why LOE lack of high-quality audit demanding and discusses how to strengthen the provisions of auditor choice to protect investors'interest.Chapter seven:The chapter summarizes the conclusions and some research suggestions. Finally, author points out the shortcoming of this thesis and future research directionThe innovations of the thesis:1.The thesis summarizes and examines the determinants of the manager's normal compensation and establishes the quantitative indicators of the manager's compensation regulation. These indicators provide basic theoretical model for the future research.2.The thesis discusses the consequences of government directly intervening executive compensation from information transparence perspective for the first time.Author also connects nominal compensation regulation with the supervision of controlling rights benefit. This research is useful for testing the effectiveness of government policies to provide advice for policy formulation and implementation. It is also helpful for perfecting the corporate governance structure in China and providing theoretical basis and empirical evidence for strengthening information disclosure system.3.Author finds compensation regulation may cause executives of SOE to implement "hiding profit", "reducing non-pecuniary compensation disclosure", and "choosing incompetent auditors". These behaviors are used to reduce accounting information transparency. These chain reactions of policy suggest government should pay attention to the supporting measures of compensation regulation policy. Otherwise, it would cause managers to switch from "extraordinary nominal compensation" to "invisible corruption", misleading the original of compensation regulation policy and reducing the efficiency of market supervision.4.This thesis combines theoretical analysis and conclusions from the three empirical studies to puts forward future reform direction in restricting extraordinary compensation in SOE.This thesis also points out that the government direct intervention on executive compensation in SOE can only suppress the symptoms without curing the illness.In long-term, adjusting the relationship between the local government and SOE, improving performance evaluation system in SOE (especially monopoly SOE), strengthening public disclosure of compensation contracts and awarding the minority shareholders to special voting rights on executives'compensation is the fundamental measures f to solve the problems from institutional level.