An Empirical Research On The Effect Of Senior Executive Compensation On Internal Control Information Disclosure

Information of internal control is a necessary component of integrated financial information. It not only explain and illustrate the financial data, but also expand the meaning of financial information. It is very important for investors making decision. Internal control, in COSO report (1992), is defined as "a process. implemented by board of directors, managers and other employees, to provide reasonable assurance of such goal as, the accuracy of the financial report, the effectiveness of management activities, following the rule of relevant laws and regulations, and so on." It emphasizes that the objective of internal control is to guarantee the legitimacy and compliance of management activity, security of assets, true and reliability of the financial report and some other related information, then achieve the ultimate goal of improving efficiency and effectiveness of management and enterprise development strategy, in Chinese Basic rule of internal control. Due to the important role of internal control, internal and external information users need to pay great attention to it. Hermanson (2000) think that auditted internal control report can strengthen supervision and improve efficiency of internal control. Disclosure of internal control information can help investors to learn the information of the implementation of internal control, then help the enterprise to improve efficiency of the management.In our country, the disclosure of internal control information is in the initial stage, most of the companies choose to report internal control information voluntarily. In view of different requirements on disclosure of internal control information between Shanghai stock exchange and Shenzhen stock exchange. According to results of many living research, most of the companies listed on the Shenzhen stock exchanges comply with the standard of internal control and some other related regulations more well. As we all know, Chinese capital market is still not well developed, and the way of external investors need information is few, to a great extent, it only rely on the listed company’s disclosure system, but there are many facts proved that the demand of information of internal control is not high in the listed companies. The disclosure of internal control information is only in form mostly, is just meet the regulatory requirements of government, so this information is little useful to investors’decision-making. Therefore, only these external rules of internal control may not good enough, it is the limitation of this study that draw out the problem discussed in this paper.Based on the perspective of the principal-agent theory, the owners’ control rights and the managers’ rights are separating, it make the top manager who enjoy the rights have internal control information. If shareholders and other investors want to know to the information of the design and operation about the internal control, they must pay the corresponding fee, namely is executives disclosure cost of internal control, including necessary increasing labor expends of top managers, it is executive’pay on specific. Thus, increasing compensation can motivate top managers better meet the requirements of the basic rule of internal control and related guidelines. In addition, the8th article in the basic norms of internal control points out that enterprise should set up an incentive and restraint mechanisms to do internal control, and let worker’ efforts of implementing internal control into the performance evaluation system, then promote the internal control run more effectively. It illuminates that necessary incentive mechanism related to the performance can promote internal control, so in the circumstances of contradiction between internal control rules and internal control information disclosure level, we can turn to make research on the internal factors of information disclosure in every company, and try to build up internal incentive and restraint mechanisms, then improve the internal control information disclosure constantly. Presently, scholars make research on effect on executive compensation on internal control information disclosure from the incentive perspective is very rarely little. I think that scientific and effective executive pay system should combine the executives’own benefits with their operating level, and realize its’incentive and restraint function. Nevertheless, one of the important aspects of the comprehensive management level is the practice of the internal control system, so reasonable and effective executive compensation make great effect on internal control information disclosure.This paper is divided into six chapters: Chapter one is an Introduction.This chapter describes the research background, the research significance, the research of the main content and the basic framework. research methods and materials, and the innovation points of this paper.Chapter two is a review of the literature.This chapter makes a review of the literature, domestic and at abroad, of executive compensation on internal control information disclosure at first. Many scholars study external factors that influence internal control information disclosure, however, less of them make research on internal factors concretely, especially from the incentive angle to consider its effect on internal control information disclosure.Chapter three is the basic concepts and basis of theoretical.The first part of this chapter is introducing the concept of that executive compensation, and internal control disclosure. The second part focuses on the theoretical base of this research, such as the principal-agent theory, the incentive theory, and signal transmission theory. Thirdly. I analyse how executive compensation influence internal control information disclosure according to the three basic theory. Finally, I conclude that higher pay can improve the level of internal control information disclosure, namely, the former have a positive effect on the latter.Chapter four is study design.In this chapter,1propose the research hypotheses, design variables, and explain such empirical means as, research methods and materials, analysis tools, sample classification and so on.Chapter five is the empirical results and analysis of the effect of senior executive compensation on internal control information disclosure.In this chapter, I describe internal control information disclosure situation from2007to2010, and make empirical analysis on the effect of senior executive compensation on internal control information disclosure, and use total sample and classificated sample according to their equity properties separately.Chapter six is conclusion of the study and advice.This part is conclusion of this paper, it bases on the front context of the article, such as, review of the literature, study design, empirical research. Then, I give some relevant suggestions according to the conclusion. This conclusion of this paper is executive short-term compensation have significant positive incentive effect on internal control information disclosure, whereas executives long-term compensation of internal have weaker positive effect on control information disclosure, some classificated sample proved there may be weak negative effects. According to the above analysis, we can make our efforts from such three aspects, that is, the structure of salary, compensation levels and performance measures, and base on their relationship with internal control information disclosure, then put forward measures to improve the positive effect on internal control information disclosure.Main contribution of this paper.There are two main contribution of this paper:on the one hand, I choose from top managers angle to study its effect on internal control information disclosure. We can analysis how to motivate top managers to improve internal control information disclosure comprehensively and thoroughly. That is a study object on this paper, which has created a new focus and research. It is of great importance to practical use. On the other hand, senior executive compensation have two parts: short-term executive pay and long-term executive pay, each of them have different effect on internal control information disclosure, based on the view of the incentive theory, the short effect of long-term compensation, such as incentive equity, may be quite not significant, therefore I classify the whole compensation into short-term executive compensation and long-term executive compensation, then make study on the two part separately. The conclusion of this paper can provide some useful suggestions to perfect existing compensation contracts.The limitations of this paper.(ⅰ) On the design of the index system of internal control information disclosure, the score of second index is by manual means, it is hard to avoid subjective factors, its reliability can’t be well assured, therefore the construction of internal control information disclosure index needs further research.(ⅱ) On the definition of top manager, in the annual report from2007to2010, we can aquire the compensation information data from the total annual pay of current directors, supervisors and senior manager, or the annual pay of the highest three directors, or the annual pay of the highest three managers. Due to the limitation of the data acquisition and variables design, therefore, we only choose the annual pay of the highest three managers as independent vanable. however, and top manager, who take part in internal control mformation disclosure, is not only the senior manager, but also involve other board members, such as board supervisors, etc. And Senior manager have too narrow range in this paper, there may be need extra study.(ⅲ) On data acquisition, in annual report, downloaded from GUOTAIJUAN database, senior executive long-term compensation don’t include all long-term salary, the same as the short-compensation. If I collect the omit data, we can increase the reliability of the research results. Therefore it needs to be perfect for the data collection.