Research On The Validity Of Compensation Contract: A Perspective Of Earnings Management

As an institutional plan of corporate governance, being led into of compensation contract can incent agent to work hard, and curtail the benefit conflict between client and agent. However, how valid is the compensation contract? Can it keep down the management's self-serving behaviors efficiently? Can it avoid the earnings management relating to the compensation contract?Taking with these questions, this paper verifies the validity of compensation contract in the perspective of earnings management according to use data of Chinese listed companies from 2007 to 2008. The research find that the augment of management's compensation is significantly positively related to the income-increasing earnings management, and the increase of earnings management is also significantly positively related to the increase of management's compensation in the companies in which the earnings management is heavier than it of last year. The conclusion remained be right after robust test.The conclusions verify that the increase of compensation can be explained partly by earnings management and the compensation contract can not avoid the earnings management actions of manages, which damage the validity of compensation contract.This research verifies the classical hypothesis of empirical accounting theory that manages may affect the melon-cutting plan through earnings management. Then, this paper adopt more rational research design to test the relationship between senior manages'compensation and earnings management. This research not only stretch the literature about earnings management, but also have important meaning to standardize the senior manages'compensation contract.