CEO Power, Pay Duration, And Earnings Quality

The equity incentive system in our country has made a great progress since2005, and it is still developing vigorously. The problems led to by the equity incentive system have been paid attention of many scholars. While, shareholders and outside investors want to know the companies’earnings quality that used to judge the companies’performance, condition and the value. So there are many researches about equity incentive springing up as time goes by. Among these reasearches, there are so many papers about the relationship between the equity incentive and the quality of enterprise. These papers studied the various properties and various influence of the equity incentive from various angles. For example, Wanghua and Huangzhijun(2006) have analyzed the equity incentive effect on the value of the company. Lvchangjiang and Zhenghuilian et al(2009) divided the companies into the motivational companies and the welfare companies to study the effect of corporate governance on the equity incentive. Lvchangjiang and Yanmingzhu et al(2011) did research for the purpose of companies choosing the equity incentive about equity incentive. Wuyuhui and Wushinong(2010) did research about the self-interest behavior of managers from the examination conditions of equity incentive. It is unable to list all sorts of rich research angle. However, there are no articles had been found to exhibit time property of equity incentive as the purpose in our country. While this paper will research the pay of CEO from the time property of equity incentive, which research the effect of CEO power on CEO pay duration and the behavior of CEO’s earnings management activities because of his short pay duration through the index of pay duration.This paper will start and end the study with the following chapters.The first chapter is introduction with a general scan and conclusion of this article. It includes the research background, research purpose and value, research framework, research content and frame, research ideas and methods and the expected contribution.The research background introduces economic situation and relative theories. The research purpose was presented from three aspects. Research value with both theoretical and practical value, is a brief introduction of its significance. The research framework and content briefly describes the main structure of this paper and contents of each chapter. The research ideas and methods are the expatiation of the research background and original ideas, as well as a description of research methods. And the expected contribution mainly is innovation points, theoretical and reality contribution of this paper, compared to the previous literature.Chapter two is the literature review. This chapter summarizes previous research literature review from two aspects, namely, chief executive officer power and pays duration, the pay duration and earnings quality. In CEO power and pays duration section, although there was no research of pays duration in China, this paper collects relative researches about power and salary. Then, this paper continues to introduce the relevant literature review about pay duration and earnings quality, but no direct literature about pay duration. However, pay duration is calculated by the time to get monetary compensation, options and restricted stock. Thus divided this section into three aspects, the CEO compensation and earnings quality, CEO equity and earnings quality, and CEO option and earnings quality to summary three aspects about earnings quality. The end of this chapter commented on all these relative literatures.The third chapter is theoretical analysis. Firstly, this section defined three concepts covered, that are CEO power, pay duration and earnings quality, with a focuses on pay duration. Pay duration, which is imported from abroad and not familiar to most readers, is the basic concept. Then, this section introduce corporation theories involved in this study, respectively, over agency theory, Managerial Power Approach, Human Capital Management, Asymmetric Information Theory and Risk Preference Theory. Theoretical study of this paper is based on the principal-agent theory. Under this theory, CEO will be for their own interests, tend to get high returns, that is, the existence of agency costs. Therefore, in the process of equity incentive design, CEO has its impact, for private interests, resulting in a shorter duration reward. Furthermore, according to the asymmetry of information, in order to get a shorter duration reward, there might be corresponding earnings management behavior.Chapter four is empirical research design. In this chapter first introduced data source and sample selection, followed by application and analysis of the theories, proposes two hypotheses as follows.H1:CEO, who has a larger power have shorter pay duration than CEO with smaller power.H2:Earnings quality is worse with CEO who has shorter pay duration than CEO who has longer pay duration.Then introduce the regression model of CEO power and pay duration, as well as the model of pay duration and earnings quality. In the relevant model of earnings quality, this paper divided earnings quality into accrual earnings management and real earnings management for regression, as CEO could do both accrual earnings management and real earnings management. Therefore, hypotheses two were verified in these two aspects. Finally, this paper defines variable and its calculate methods, also listed in table.Chapter five analyzes the empirical test results. Firstly, this article did descriptive statistics, and studies the year distribution situation based on the samples that CEO equity incentive applied. Then sub-model variables used in the model of descriptive statistics. In the descriptive statistic of CEO power and pay duration model, CEO authority constituted factors as well as other important relevant characteristics were studied. In the descriptive statistic of earning quality relevant model, the characteristics of important variables were analyzed and the differences between significant variables were compared. Then correlations between variables were examined for the initial judgment and the important correlation between explanatory variables and test the multicollinearity. As for possible inspection, VIF further conducted to assure multicollinearity does not exist between the variables. Later, regression analysis was conducted to test the hypothesis before. In the end of this chapter, substitute the relevant variables to validate the robustness of the model.Chapter six is conclusions and implications of the study. This section firstly summarized two important conclusions of this paper, and then presented policy recommendations from the perspective of both the corporation and the investor.In the end of this study, limitations were presented, and also give future research outlook in this area, such as expanded sample and transform objects.The main innovation of this paper is that based on equity incentives, introduces pay duration concept to measure the time attribute of CEO compensation, verified that CEO power effect on pay duration, namely, larger the CEO power leads to a shorter pay duration. Meanwhile, this paper also prove the effects of pay duration to earnings quality, that is earnings quality is better with CEO who has shorter pay duration. Therefore, when CEO manipulates its pay duration, it should be restricted, and for those CEO who has shorter pay duration, earnings quality of its enterprises should be focused.