An Empirical Study On Internal Salary Gap And Earnings Management

With the development of China’s capital market, public concern for listed companies’ financial reports is growing. Shareholders, creditors and other stakeholders make their economic decisions on the basis of accounting earnings information, so accounting earnings information’s importance has become increasingly prominent. However, due to China’s capital market are not perfect, less regulatory supervision and some other reasons, it is easy for company’s executives to manage earnings, so accounting earnings information disclosed by listed companies is less convincing in authenticity and reliability. Accounting information distortion phenomenon occurs frequently. Executives of listed companies hold the business decision-making power and have important influence on the development of the company, but some executives are likely to do harm to the overall interests of the company in the pursuit of their own interests. One of the methods to solve this problem is to make salary incentive policy for executives. Accounting performance is one of the important measures in making the salary incentive policy. In recent years,the compensation disclosure system has been gradually improved, high salary of executives has caused extensive concern of social public and the compensation gap between executive has also become a focus of attention.Compensation contract is one of the motives of earnings management,executives of listed companies may manipulate accounting earnings to improve companies’ performance in order to improve their own pay and reduce the pay gap. In this paper, we use the combined research methods of normative and empirical. We select 9195 companies from China’s A-share listed companies during the period of2010-2014 to study the relationship between executives’ internal pay gap respectively with the accrual earnings management and real earnings management. The results show that the internal pay gap’s relations with accruals earnings management and real earnings management, respectively, are positively correlated, indicating that the greater executives’ internal pay gap is, the executives are more likely to manipulate accrual earnings and real earnings. Non-state-owned enterprises’ executives are more likely to manipulate earnings than state-owned enterprises’ executives and executives’ internal pay gap has a greater impact on state-owned enterprises than on non-state-owned enterprises. It is more likely to induce state-owned enterprises’ executives to do earnings management. At the same time, this paper proves thataccrued earnings management and real earnings management have the relationship of coexistence rather than replace.At the end of this paper, we put forward some suggestions on increasing penalties for earnings management behavior, understanding the actual needs of executives, perfecting the incentive system of executive compensation and salary disclosure.