Impacts Of Accounting Information Comparability On Executive Compensation Contracts

Executive compensation has long been a key issue in corporate governance research in China.It relates to not only management accountability,but also investor protection and social fair and harmony.In recent years,Chinese A-share listed firms have generally established a kind of performance-based tournament structure in executive pay arrangements,which bring about rapid growth,as well as substantial divergence,of executive compensation.Emerging anomalies such as extortionate pays and zero pays have been challenged and criticized by the public,the media and regulators.As regard to executive pay efficiency,the optimal contract theory holds that performance metrics can be used to improve on the compensation contract.While compensation stickiness and growth in spite of performance recessions occur frequently in Chinese listed firms.As regard to executive pay fairness,the executives often opportunistically use their power in hand to manipulate the compensation so that executive pays grow much more rapidly than employee pays,aggravating pay gaps and exacerbating distribution conflicts.Although the government has put out a series of regulations to deal with the compensation anomalies,the effects of the policies are not very ideal.It is necessary to make further efforts to investigate the potential influences and mechanisms in executive compensation contracts so as to provide the stakeholders with new insights and valuable references.Accounting performance measures are extensively used in compensation contracts for their availability,reliability and informativeness of agents' actions,while it has long been doubted for the vulnerability of accounting earnings to managerial manipulation.High quality is a prerequisite of accounting information usefulness.As one of the essential features of accounting information quality,comparability means that for a given set of economic events,a firm produces similar financial statements in successive accounting periods and its financial statements are similar to that of other firms which experience the same set of economic events.The extant literature suggests that high comparability can enhance the usefulness of accounting information in decision-making and contracting,high comparability allows the information users to make more accurate judgments about fundamentals of the firms so as to optimize resource allocation decisions leading to a set of positive economic consequences.As yet empirical studies on the effects of accounting information comparability on executive compensation contracting are very limited.This article investigates the relationship between accounting information comparability and executive compensation,adds to the literature on the economic consequences of accounting information comparability and contributes to compensation practices in China.Based on the contracting usefulness of accounting information and compensation-related theories,including agency theory,optimal contract theory,managerial power theory,tournament theory and behavioral views,we explore the role of accounting information comparability on executive compensation contracting.Using the data of A-share listed firms from 2005 to 2018,we have drawn the following conclusions:Firstly,accounting information comparability improves the efficiency of executive compensation contracts.We find that there is a positive association between accounting information comparability and pay-for-performance sensitivity.We also find that accounting information comparability alleviates compensation stickiness.Moreover,firms with higher comparability are more likely to use relative performance evaluation to reduce pay-for-luck.In cross-sectional tests,we find that the association between comparability and pay-for-performance sensitivity is more pronounced in firms with complex information,which indicates that comparability can lower the information acquiring and processing cost of shareholders and then optimize their compensation decisions.In addition,we find that the effect of comparability is more pronounced in non-state-owned firms which are less regulated.Secondly,accounting information comparability promotes the fairness of executive compensation contracts.We find that,ceteris paribus,accounting information comparability is negatively associated to the pay gap,as well as the pay stickiness gap,between executives and employees.Moreover,we find that the positive effect of pay gap on firm value is more pronounced in firms with higher comparability.In cross-sectional tests,we find that the association between comparability and pay gap is more pronounced in non-state-owned firms.In addition,accounting information comparability is negatively associated with executive overpay and is positively associated with the use of stock options,which indicates that comparability induces the shareholders to change the structure of executive compensation so as to reconcile fairness and efficiency.Thirdly,accounting information comparability improves the users' judgments on the justification of executive compensation growth.We find that comparability weakens the positive association between executive compensation growth and external pay gap,and compensation growth driven by external pay gap impairs firm value,and accounting information comparability further enhances this negative effect.In cross-sectional tests,we find that the above detrimental effects are more pronounced in non-state-owned firms than in state-owned firms.We further find evidence that institutional ownership decreases as the unjustified compensation growth increases and the negative association is more pronounced for independent institutional investors when accounting comparability is high.Last but not least,we employ an event study to examine whether comparability affect the market reaction to compensation anomalies.Our results indicate that the market reacts negatively to the deviation of compensation growth and firm performance.The cumulative abnormal return of both event window(-3,3)and(-5,5)is significantly negative when executive compensation increases in spite of performance falters.Moreover,the negative reaction is more pronounced in firms with higher comparability.This study makes the following contributions to the literature.Firstly,we contribute to the literature by focusing on the effect and mechanism of firm-level accounting information comparability.We find that comparability promote not only the efficiency but also the fairness of executive compensation.It also has important influence on the compensation growth and related economic consequences.This study provides a fully integrated analysis framework and enriches the understanding of the influences of accounting information comparability on executive compensation contracting.Secondly,we analyze the differences of incentives,abilities,costs and benefits on the use of accounting information in contracting between state controlling shareholders and non-state controlling shareholders in Chinese settings.We further analyze how the shareholders and employees use accounting information comparability to optimize their understanding and judgment on the fairness and justification of executive compensation.This study not only expands and enriches the literature,but also provides valuable implications to compensation practices.Thirdly,this paper contributes to the compensation literature by studying on the compensation growth or adjustment instead of compensation level.We investigate profoundly the justification of executive compensation growth and related economic consequences.Our findings suggest that the unjustified growth impairs firm value and the situation becomes worse when accounting information is more comparable.This study provides a new perspective to analyze the consequences of executive compensation and contributes to not only the literature but also the market participants.