Research On Accounting Standards Change,Accounting Information Quality And Executive Compensation Contract Effectiveness

In the recent years, the international convergence of accounting standards has become a major important trend in the history of the development of accounting. It is a significant change of accounting standards, will cause some significant economic consequences, including making a tremendous effect on accounting information quality. With the establishment of the modern company system and the separation of company’s ownership and control, the principal-agent problem has emerged. In order to resolve the principal-agent problem, the executive compensation contract is designed to encourage the executives to try their best to work. Thus,"adverse selection" and "moral hazard" will be decreased in a way of stimulation. Then,"incentive compatibility" between the principal and the agent will be realized, which means that the maximization of the firm value will have been realized during the process of that the executives are pursuing their own interests."Incentive compatibility" is a warranty to promote incentive efficiency and to improve the effectiveness of executive compensation contract. Therefore, to ensure incentive compatibility realized and incentive efficiency improved, it is in a need of binding both firm output and executive compensation in the designation of executive compensation contract. Accounting information is a reflection about firm financial situations, outputs and cash flows, acting as a signal deliverd function, serving as a base to pay the executives compensation. So, the designation of the executive compensation contract is dependent on the application of accounting information. Accounting information quality characteristics are basic requirements for accounting information and are basic provisions to achieve accounting aims. Higher quality of accounting information can improve the level and effect of accounting information applied in the executive compensation contract. On the contrary, lower quality of accounting information will decrease the level and effect of accounting information applied in the executive compensation contrac. Hence, the application of accounting information in the executive comensation contract will be affected by accounting information quality. From the above, there is a logic consistent connection among accounting standards change, accounting information quality and executive compensation contract usefulness, which can be expressed as following:Accounting standards change has some economic consequences and will exert an influence on accounting information quality. While, the change of accounting information quality will again have an effect on the application level of accounting information in executive compensation contract, and further have an effect on the usefulness of executive compensation contract. Therefore, accounting standards transition, accounting information quality and the usefulness of executive compensation contract consist of a logical consistency research system, and constitute the main research content of this study.There are both theoretical significance and practical significance of this research about accounting standards change, accounting information quality and the usefulness of executive compensation contract. This study about accounting standards change and accounting information quality enriches the present research about the economic consequences of accounting standards change, and empirically examines whether the goal of accounting information quality improved has been realized by the convergence of China’s accounting standards with international accounting standards so that an objective evaluation will be made about the Chinese accounting standards reform and a guiding direction will be provided for the future accounting standards reform. This study about the change of accounting information quality caused by accounting standards change and the usefulness of the executive compensation contract enriches the present research about firm executive pay-performance sensitivity, plays a guiding role about how to design firm executive compensation contract after accounting standards change. In addition, this study makes some empirical analysis about accounting standards change and the usefulness of the executive compensation contract of the state-owned and the private firms. So, it has a guiding significance for the state-owned and the private enterprise in their executive compensation contract designation after accounting standards change. In a word, this study plays a guiding role in the designation of firm executive compensation contract after the change of accounting standards in our country, and is beneficial for promoting the incentive efficiency and the incentive effect of the executive compensation contract. Therefore, this study has a certain practical significance for the designation of enterprise executive compensation contract in our country.This paper ties accounting standards change and executive compensation contract effectiveness with the help of accounting information quality as a media, makes a detail research on accounting standards change, accounting information quality and executive compensation contract usefulness. Chapter1summarizes the background and motivation for this topic, research ideas, research methods, research structure arrangement and research contribution. On the base of reviewing and summarizing the research on accounting standards change and accounting information quality as well as the research on accounting information applied in executive compensation contract, Chapter2points out the research gap in the present literatures and lays the literature foundation of this study. Chapter3generalizes and elaborates the theories applied in this study, regarding that the institutional change theory, the economic consequence theory, the accounting objective theory, the principal-agent theory and the human capital theory are comprehensively applied in the research on accounting standards change, accounting information quality and the usefulness of the executive compensation contract. Chapter4makes a comparative analysis between the new and the old accounting general standards and between the new and the old accounting specific standards. describes the two most important accounting information quality characteristics——accounting information reliability and accounting information relevance, and predicts that the new accounting standards published has double effect on accounting information reliability, that is improving or decreasing the accounting information reliability, and makes a prediction that there are more application of the aaccounting estimation and the accounting professional judgement and moderate application of the the fair value in the new accounting standard, which will improve accounting information relevance. Chapter5mainly elaborates the working mechanism of the executive compensation contract, including executive compensation’s every component and its characteristics, the mechanism on accounting information applied in executive compensation contract, the relation between accounting information quality and the usefulness of executive compensation contract. Chapter5also makes the theoretical analysis and predictions on how will the change of accounting information quality caused by accounting standards change affects the application of accounting information in executive compensation contract. Chapter6makes an empirical research on the relation between accounting standards change and accounting information quality, the result indicates that accounting standards change has significantly decreased accounting information reliability and significantly improved the accounting information relevance. Chapter7makes an empirical analysis about accounting standards change and the usefulness of executive compensation contract with the help of accounting information quality as a media, further explores the specific manifestation of accounting standards change and the usefulness of executive compensation contract in the state-owned enterprises and the private enterprises. The result indicates that accounting standards change has significantly decreased the executive pay-performance sensitivity based on firm accounting performance and significantly improved the executive pay-perfonnance sensitivity based on firm market performance, which is more obvious in the private firms. According to the empirical conclusions on the base of the previous empirical research, Chapter8puts forward the three suggestions to perfect the executive compensation contract from the angle of accounting information. Chapter9summarizes the conclusions of this study, points out the limitations of this study, and makes an outlook about the future research direction.This article makes some empirical research about accounting standards change, accounting information quality and executive compensation contract usefulness. The research results indicate that, after accounting standards change, the level of earnings management has been improved so that the reliability of accounting information has been decreased, which further reduces the weight of firm accounting performance in executive compensation contract. Therefore, the executive pay-performance sensitivity based on accounting performance has been significantly decreased, which means that the incentive effect of accounting performance has been significantly decreased. Instead, after accounting standards change, accounting information relevance has been significantly improved by the more application of accounting estimation and accounting professional jugement and by the moderate application of fair value and other measurement methods, which further improves the weight of market performance applied in executive compensation contract. Hence, the executive pay-performance sensitivity based on market performance has been significantly improved, which means that the incentive effect of market performance has been improved. In addition, the enterprises can be divided into the state-owned enterprises and the private enterprises according to the enterprise ownership in our country. The ownership of the state-owned enterprises is belonging to the state and there is an executive compensation regulation phenomenon in the state-owned enterprises, which results in that the executive pay-performance sensitivity of the state-owned enterprises is not sensitive to the change of accounting information environment. Therefore, although the reliability of accounting information has been decreased and the relevance of accounting information has been improved after accounting standards change, the executive pay-performance sensitivity based on accounting performance and the executive pay-performance sensitivity based on market performance have not significantly changed in the state-owned enterprises. On the contrary, the private enterprises are owned by individuals and the executive compensation of the private enterprises is formed through market negotiation mechanism. Thus, the executive pay-performance of the private enterprises is sensitive to the change of accounting information environment in designing executive compensation contract. So the private enterprises can timely adjust their executive compensation contract according the changed accounting information environment to maintain the executive compensation contract usefulness. This is shown as following:One hand, the reliability of accounting information has been decreased after accounting standards change so that the weight of accounting performance in the private executive compensation contract has been decreased so that the executive pay-performance sensitivity of the private enterprises has significantly been decreased. Therefore, the incentive effect of accounting performance has been reduced in the private firms. On the other hand, the relevance of accounting information has been improved after accounting standards change so that the weight of market performance in the private executive compensation contract has been improved so that the executive pay-performance sensitivity of the private enterprises has been significantly improved. Therefore, the incentive effect of market performance has been significantly increased.This study maybe has the following contribution:First, this study makes a research on accounting information quality change caused by the whole accounting standards change by an empirical research design, which expands the present research on the change of accounting information quality caused only by one specific accounting standards change, so that an overall evaluation about the economic consequences of accounting standards change has been made. In addition, the research period of this study is during2002-2011, which makes an empirical research on accounting information quality change caused by accounting standards change from a long period, exploring the long-term effect on accounting information quality caused by the accounting standards change. The research period of the present literature on the same problem is just before2007. Thus, this study is different from the present research and expands the present research on the short-term effect on accounting information quality change caused by accounting standards change. Secondly, with the help of accounting information quality as a media, this paper first explores the relationship between the accounting standards change and the usefulness of executive compensation contract, makes accounting standards change, accounting information quality and the usefulness of executive compensation contract as a research system, enriches the present research on the economic consequences of accounting standards change and on the corporate executive compensation contract.Finally, with the help of accounting information quality as a media, this paper further explores accounting standards change and the usefulness of executive compensation contract in different enterprise property rights, further expands the research on accounting standards change and the usefulness of executive compensation contract, and further enriches the research on the economic consequences of accounting standards change and executive compensation contract designation in different firm property rights.