Research On Executive Compensation And Earnings Management Preference Of Listed Corporations

As a vital bridge connecting stakeholders with those listed companies, financial reporting provides possibilities for enterprises to disclose relative information to the public. Earnings management, however, directly harms the quality of financial statements and reduces its validity, which stands in the stakeholders’ways of making proper decisions based on real situations. It brings not only losses to external stakeholders but extra expenses to the company itself, which in turn decreases the effectiveness of the capital market. Studies on motivations of earnings management serves as the significant breakthrough to set up a monitoring mechanism of earnings manipulation and imposes restrictions on such behaviors. As to the remuneration contracts motives, no general-accepted conclusions have been reached although an extensive literature has already made their contributions. Besides, most of domestic scholars put their emphases on accrual-based earnings management and ignores real earnings manipulation, a more popular and secret way. Compared with rule-based accounting standards, current researches believe that the inductivity of principle-based standards turns the ways of earnings management into real earnings manipulation. Therefore, the author combines real earnings management with manipulations of accruals to reach a more comprehensive conclusion on whether earnings management imposed by motivations of remuneration contracts exists and tries to fill in the blank of this field. In addition, taking our special national condition into consideration, enterprises with different ownership structures shows distinct characteristics in executive compensation and corporate governance, which means the influences that remuneration contracts motives have exerted on earnings management of enterprises with different ownership structures are different. Therefore, we are willing to know whether different degrees of agency problems will bring systematic diversity to remuneration-contract-based earnings management when ownership structure is taken into consideration. Finally, the article provides basis to the revolution of state-owned enterprises, the improvement in monitoring system of capital markets and the establishment of executive compensation contracts through a systematic and comprehensive research on this issue.The main content of the research was developed in three areas:Firstly, is remuneration contract a component of remarkable motivations of earning management by listed company. More specifically, the question was examined through two ways includes:(1) whether remuneration contract is a constituent in notable causes of accrual-based earning management of listed company.(2) Whether remuneration contract is a constituent in notable causes of real earning management of listed company. Secondly, this paper analyzes the influences that different variables in remuneration contract to accrual-based earning management and real earning management. Last, the theoretical analysis was tested statistically by dividing the listed company into state-owned enterprises and non-state-owned enterprises. Through this partition, this paper detect if different conclusions will be researched in these two kinds of ownership in listed company. To study the content mentioned above, this paper was organized into six parts.First:introduction.In this part, the background, purpose and importance of earning management problems related to remuneration contract is presented in the first place. Then, I will depict the structure and methodology of the research.Second:literature review. This paper review the related literature in three aspects:earning management, relationship between management compensation and earning management and the influence that property of ownership to executives’remuneration and earning management.Third:theoretical analysis. Three important concepts, including management compensation, earning management and property of ownership, are defined firstly. Then the fundamental theory of this paper, agency theory and information asymmetry theory will be stated. Based on theory derivation oriented in human capital theory and compensation contract theory, a conclusion that remuneration contract may be a cause of accrual-based and real earning management is researched. I also expect that the earning manipulation motivated by remuneration contract is affect by property of company’s ownership because the efficiency of remuneration contract is influenced by degree of accountability in corporate governance.Forth:research design. In this part, variable definition and the process of sample selection are presented particularly. And for the most important part, main assumption and regression model are raised.Fifth:empirical test. I first check the correlation between numeration contract and accrual-based earning management, then between remuneration contract and real earning management. Secondly, by adding the cross connection term of ownership and the replacement variables of management remuneration into all the models, this paper achieves the purpose to exam that whether property of ownership will affect accrual-base and real management.Sixth:Conclusion. After concluded the research, extent policy suggestions are made. Last but not the least, the possible innovations and limitations of this paper are presented.My findings indicate that:(1) remuneration contracts do form a motivation for public companies to manipulate earnings and this rule can apply in both accrual-based and real management.(2) Different components in remuneration contracts show different influences in earnings manipulation. Firstly, executive compensation significantly has positive effect on the two styles of earnings management. Secondly, stock-based incentives probably lead to more real earnings managements in manufacturing costs and have little influence in manipulating of accruals. Thirdly, more shares the executives hold, more upward manipulation of accruals exists and the total space for accrual-based earnings management is increasing no matter what direction it is. On the contrary, the level of executives’ shareholdings significantly restrains real earnings management. Besides, the sensitivity of executive compensation to their performances has little influence in both ways of earnings management.(3) Ownership structure does exert similar influences on both kinds of remuneration-contract-based earnings management. In general, state-owned shareholdings have a small negative influence on both kinds of remuneration-contract-based earnings management. Specifically, state-owned shareholdings enhance the promotion that executive compensation has made to earnings management. In other words, executives in state-owned listed companies are more likely to manipulate earnings in order to achieving higher compensations. On the other side, state-owned shareholdings also weaken the sensitivity between compensations and performances, reduce stock-based incentives and limit the influences that the level of executives’ shareholdings have imposed on earnings management, which is to say, for state-owned companies, whether compensation system has significant relations to performance, whether the company has authorized stock warrants and whether executives have held shares of their companies barely has nothing to do with both accrual-based and real earnings management.According to the literature review, I believe this paper has at least four innovations compared to previous study. Firstly, dividing earning management into accrual-based and real one makes the conclusion more comprehensive. Secondly, during modeling, I check the management remunerations in four dimensions to get its relationship with earning management. Thirdly, to assure statistic calibers’persistent, this paper uses the total compensation of chief manager as the replacement variable of executives’ remuneration. And meaning of this improvement has also been proved by the test results. Furthermore, considering the different characteristics of remuneration in state-owned and non-state owned company, I include ownership variable innovatively.The shortcomings of this paper include:(1) although it is widely applied, whether the model used in measuring real earnings management here can represent the degree of real earnings management needs further researches as the adjusted coefficient of determination isn’t that high.(2) The complexity and full-disclosures-requirements of compensation plans and the existence of company-paid consumption serving as a kind of implicit compensation jointly restrict researches in this area. With the development of econometric models of real earnings management and disclosure policies in executive compensation, researches on influences that remuneration contracts impose on earnings management will get more reliable and realistic conclusions.