Managerial Power, Abnormal Executive Compensation And Audit Opinion:Evidence From China

According to Agency Theory, the purpose of incentives in top-level executive compensation is relating the interests of top executives with the interests of shareholders, alleviating the agency conflict between top executives and shareholders. However on China’s capital market, there exists some abnormal phenomena in which the executive compensation are deviated greatly from the industry averages or uncorrelated even counterproductive to the company performance.Some existing research had shown that the level of top executives’compensation was affected by the managerial power, and it may reflected the defective corporate governance in the company with abnormal executive compensation. The senior management would use their power to adjust their own wages or treatment especially under poor internal corporate governance mechanism. It had broken the validity of management compensation contract, impacting the objective realization of maximizing the shareholder value. On the other hand, some other studies had found that in order to reduce the audit risks, CPA would disclose the defective corporate governance by issuing modified audit opinion. Besides, the report consumers also focus on the problem whether the independent audit could identify those companies with abnormal executive compensation by issuing modified audit opinion due to their own interests.In this paper,15286sample data from the year2003to2012China’s A-share listed companies is chosen to make an empirical study on the impact of managerial power upon the abnormal executive compensation and the problem whether the independent audit could identify the abnormal executive compensation or not. Research results show that the managerial power increases the probability of listed companies with abnormal executive compensation as other variables have been controlled and the CPA would distinguish those companies with abnormal executive compensation from others to some extent. The probability of being issued modified audit opinion is significantly higher for those listed companies with abnormal low executive compensation. For those listed companies with abnormal high executive compensation measured by absolute amounts, there is no clear evidence that the CPA had identified them. But for those listed companies with abnormal high executive compensation measured by relative amounts of top executives to normal staff ratio, there exists weak evidence that the CPA tended to issuing modified audit opinion.Due to the research results, the suggestion part of this paper offers some proposal respectively for listed company and CPA.