The Analysis Of Dynamic Relationship Between Accounting Earnings Sustainability And Executive Compensation

At present, the relationship of accounting earnings persistence and executive compensation is the hot spots in academy, which is also a problem in corporations. Under the premise of real information of accounting, accounting earnings persistence can reflect the development of enterprises. In the modern enterprise system, business ownership and management rights are separated, which come to being principal-agent problem. As a result owners have to design an effective motivation system to circumvent the moral hazard. It is an important idea that incentive managers with compensation designed by business performance with accounting information. Based on principal-agent theory, the paper analyzes the way of motivation in the corporate management. The paper analyzes the relationship of accounting earnings persistence and executive compensation with empirical analysis. Through the Granger causality test for the two key variables, discuss the interaction of them in the modern enterprise management. The paper conducts empirical analysis for China's energy companies with dynamic econometric models, and discusses the modern theory of enterprise motivation. Based on the analysis, the paper gives some reforming proposals for executive compensation mechanism of China's energy corporation. Through review of relevant literature we believe that domestic and foreign scholars issue a lot of profound studies for the problem, which based on econometric and statistical testing methods with a representative of samples. There are some Inspiration from the review:how to design indicator for accounting earnings persistence; a linear relationship between accounting earnings persistence and executive compensation; there are many the determinants of executive compensation, so there may be adding some financial indicators as auxiliary variables for empirical analysis. And put forward the directions of advanced study:Firstly, it is inadequate that only to consider the impact of the same time, which ignore the lags of policy effect, institutional effect, management incentive effect. We should put the time lags into the empirical analysis. Secondly, it can not take full account of the dynamic changes of the sample with cross-sectional data. In the literature analysis, we find that it is little research with panel data. In order to get more information from the sample, this paper makes panel data as sample.This paper argues that because of the separation of ownership and management in the modern enterprises, business owners and operators determine the rights and obligations through a contract. For information is asymmetric, the contract is incomplete contracts. As a result, the operators become the true manipulator of the cooperation, which is result in principal-agent problem. The problem causes inconsistent orientation of interests between business owners and operators. In order to ensure the maintenance and appreciation of enterprise property rights, business owners have to adopt the necessary incentives to promote the same of interest function between enterprise managers and business owners. Modern motivation theory suggests that compensation is the most critical effective incentive to employees. So the paper should argue executive compensation. When designing the system of motivation, the necessary basis is needed to put together he interests of managers and owners, which is accounting performance. Accounting earnings persistence can reflect the performance of long-term viability of enterprises in the corporate accounting system.The analysis sample from China's energy industry, which is panel data consisting of 80 listed companies from 2002 to 2008.There are nine variables for empirical analysis, including executive compensation, accounting earnings persistence, ratio of operating profit, the stock market excess returns, the annual standard deviation of RET, cash flow of operating, return on net assets, total assets turnover ratio, and growth rate of basic earnings per share, corporate ownership of property.The paper determines the causality between corporate executive compensation and accounting earnings persistence with Granger causality test model; Lag Length Criteria is used for the order of lags. Then, we analyze own internal structure of corporate executive compensation and accounting earnings persistence with Autoregression model. What is more, based on the results of Granger causality test model and Autoregression model, the paper argues the distributed-lag relation between corporate executive compensation and accounting earnings persistence with polynomial distributed-lag model.This empirical analysis gets conclusions as listed:Firstly, in companies of China's energy industry, the corporations evaluate managers'performance with accounting performance. Accounting earnings persistence is Granger causality executive compensation, but it is not significant that executive compensation to accounting earnings persistence. Secondly, executive compensation does not exist autocorrelation, but accounting earnings persistence has, which also have a positive effect for current accounting earnings persistence. Thirdly, accounting earnings persistence has 4 lags impacts on the growth of executive compensation. Fourthly, state-owned enterprises spirit up managers with more social status, political honor, but private enterprises with more compensation. Fifthly, the total lagged multiplier is-0.066 between accounting earnings persistence to executive compensation. That is, lagged variables of accounting earnings persistence have positive effect for executive compensation. With the empirical analysis, we find that in the accumulation period, accounting earnings persistence becomes better, but executive compensation has worse development, which mean there is lack of motivation. So we believe that the continuity of accounting performance is not instituted for design of motivation system.There are some suggestions on the improvement of executive compensation motivation system for China's energy companies with the empirical analysis, which is mainly including:One side, corporations need to attach importance to incentive managers with compensation, so as to bring into play the basic function of compensation. There are three explanations:first, corporations need stable pay to protect the managers'basic needs. Secondly, corporations need to increase the incentive pay for stimulating the manager's enthusiasm. Third corporations need to modulate compensation dynamically to encourage managers to expand their business actively. On the other hand, corporations need to improve the incentive contract to avoid moral hazard. There also have three further instructions:first, corporations need to emphasis on the role of accounting information, so as to promote the interests of enterprises and managers convergence. Second, corporations need to improve the performance appraisal system for managers to make a reasonable assessment for the contribution of managers. Third, corporations need to design motivation system with development strategies of corporations to avoid manipulation of accounting profits for manager's own profits.