Earnings Smoothing, Cash Flow Volatility, And Executive Compensation

Earning smooth, the executive compensation have been a classic research topic in thefield of the company’s finance. There also have been many researches on earningsmanagement and executive compensation in nation. But mostly have been explained from theperspective of agency theory on mechanism between earning management and executivecompensation. The empirical research articles on earning smooth are greatly few. There islittle literature considering the cash flow fluctuations factors impact on the relation betweenexecutive compensation and earnings smoothing. In addition, The article also do furtherresearch on the different type of earning smoothing to the sensitivity of executive pay andearnings smoothing.In short, from the view of company’s demand of earning smoothingdemand,this article achieves the goal of the reunification between the interests of thecompany and executive compensation.On the basis of the analysis of domestic and international relevant research literatures, inthis paper we select the financial data of listed companies in China between2009and2011.We do an empirical test of the relationship between earning smooth and executivecompensation, including robustness test. The results show that: there is a positively relationbetween executive compensation and earnings smoothing; When the potential cash flowfluctuations is larger,executive pay is positively correlated with the earning smooth; when thereported profits lower than the actual profits, executive compensation and earnings smoothingis also positively related.This study have not only given a new interpretation of executives’earnings smoothing behavior, but also supplied an important practical significance to designan incentive compensation contract.