Managerial Power, Financial Restatement, And Executive Compensation

The executive compensation contract is rooted in the principal-agent problem. According to the traditional "optimal contact theory", the executive compensation contract based on company performance can help alleviate the agency problem and provide managers with efficient incentives to maximize shareholder value. However, compensation schemes in real world are not sufficiently high-powered. A lot of empirical research has shown that executive compensation is not strongly related with company performance. Thus, Bebchuk and Fried developed a new theory about executive compensation called "managerial power theory". They argue that managerial power and rent extraction are likely to have an important influence on the design of compensation arrangements which makes the executive compensation itself a part of the agency problem.Under the managerial power approach, this paper is an empirical study on the relationship among executive compensation, managerial power and financial restatement in Chinese monopoly industries. The paper select listed companies in monopoly industries as research group because the executive compensation of Chinese monopoly industries has been a hot topic since 2005.According to the results of empirical studies, the paper points out that:1) There is a significantly positive relation between managerial power and executive compensation in listed companies of Chinese monopoly industries indicating that top managers can influence their own compensation contracts.2) Financial restatements has a positive influence on executive compensation showing that top managers in listed companies of Chinese monopoly industries may manipulate the accounting information to get higher pay.3) Not all top managers who conducted financial restatement receive a lower pay as a punishment after the disclosure of the action.Based on these three empirical conclusions, the paper raised management implications on how to improve the mechanism of executive compensation in Chinese monopoly industries.