An Empirical Research Of Relationship Between Executive Compensation And Cash Flow Manipulation

The accounting profits of listed companies are applied too much subjective judgment. At the same time, accounting surplus is valued by stakeholders and used to make related economic decisions. Based on this, the company executives have the motivation and ability to manipulate the company’s accounting surplus to achieve the purpose they want. Honestly, there are quite much document about earnings management, this make publics learn earnings management clearly. Combined with Enron Event, YinGuangXia Event and a series of financial scandals happened based on accounting earnings management; publics doubt the credibility of the accounting surplus, turned to pay attention to cash flow indicator.Since cash flow is valued strongly by the public and stakeholders of listed company, as the operators of the company, would managers manipulate the cash flow like they control accounting surplus to achieve some certain purpose? In other words, is the information about the cash flow really real and reliable, and not manipulated? The answer is no. In recent years, the listed companies in China and abroad, such as the World Communication Company in the United States, Lantian Shares, Dongfang Electronics and Kelong Electric Appliances in China, all have been revealed serious cash flow control problems. That is to say, with the importance of cash flow to stakeholders, managers will put more attention to cash flow, even manipulate it to the level publics need. That behavior can be understood. As Chinese scholars, Fang Junxiong said,"What is your evaluation, what his manipulation".Based on the above background, this article started from the main operator—the company executives, relying on one of the motivations, compensation contracts motives, to discuss the deeper relation between executive compensation and cash flow manipulation. Research purpose lies in the fact that, for the academic, research about listed company executives cash flow manipulation provides empirical support, for the practice, especially the stakeholders provides some shallow suggestions and reference in decision-making on cash flow.The specific research content of this paper arranges as follow:Chapter1is introduction. The first part, the research background of this article has carried on the detailed, and the research problems of this paper were put forward; The second part, combined with those problems, we put forward the purpose and significance this paper wanted to achieve; The third part illustrated the research ideas and methods of this article, and the technology roadmap briefly; The fourth part put on the contribution of this study.Chapter2is literature review. The first part summarized the domestic and foreign research status of the existence of cash flow manipulation; the second part detailed the cash flow control motivation research, mainly includes:executive compensation contract motives, meeting the refinancing, regulatory goal motivation, gaining the loan of bank and the motivation to mislead investors; the third part expounded the enlightenment to this writing.Chapter3is theoretical analysis. The first part generalized the basic theories this article related:Trust-agent theory, Management incentive theory and the asymmetric information theory; the second part introduced two hypotheses related to with the theme of this study:Convergence of Interest Hypothesis and Entrenchment Hypothesis; The third part defined the important concepts in this article:executive compensation, cash flow and cash flow management; The fourth part made a theoretical derivation about the research for this article.Chapter4is the research design. The first part, based on the domestic and foreign literature review and the analysis of basic theory, put forward the research hypothesis in this paper. The second part made model designs to the assumptions the first part put forward. The third part made selection, definition and measurement to the variables this paper needed.Chapter5is the empirical analysis. The first part stated the sample selection and data sources of this paper; The second part made the descriptive statistics, correlation analysis, regression analysis and other empirical test and analysis to the above design of this paper using all A-share listed companies in our country as samples. The second part carried on a robustness test to the empirical conclusions of this article through replacing control variable of models. Robustness test was almost consistent with the results of this article. It explained that the research conclusion of this paper was robust.Chapters6are conclusion and advice. We summarized the research conclusion of this paper. Furthermore, we raised the suggestions for the development of market economy in our country in two aspects:executive compensation system construction and to reduction or elimination of cash flow manipulation behavior. At the same time, because of the existence of the objective conditions, we pointed some problems and deficiencies in this paper, and the direction we do the relevant research in the future.The main empirical conclusion of this paper as follows:Firstly, because the focus of this study was the relationship between executive compensation and control of cash flow, we only made correlation analysis and got the result was that, there was a significantly positive correlation between executive compensation and cash flow index.Secondly, with the aid of cash flow distribution test, we proved that the cash flow manipulation is of universal existence in the A-share listed companies in China.Thirdly, executive monetary compensation is significantly related to the control of cash flow, that’s to say, executive monetary compensation could induce cash flow control.Fourthly, when the proportion of executives share-holding is less than a certain percentage, it is negatively related to the cash flow control. Based on the above conclusion, we inferred that, the interests of the company owners and managers will converge, to reduce the motivation of cash flow control. If cash flow manipulation behavior exists, we can do a further infer, that executive and big shareholders are conspiring to control cash flow for certain purpose, such as regulation, refinancing and gaining bank loan etc.Fifthly, we haven’t found the "certain proportion" which would influence the relation between the proportion of executives’ share-holding and cash flow manipulation. That is to say, we haven’t confirmed that, when the proportion of executives share-holding was more than a certain percentage, it was positively related to the cash flow control. But we found that, because the proportion of managers’ share-holding of Chinese listed companies was relatively low, the Hypothesis4and its speculation might be true, but it was not universal in the case of the immature conditions in China. But this phenomenon should cause the attention of the company relevant personage.Finally, we found that, nature of equity would significantly affect the correlation between executive compensation and the cash flow manipulation. Specifically, compared with the state-owned listed companies, in the non-state-owned listed companies, executive monetary compensation will make the cash flow manipulation behavior stronger; meanwhile, the negative relation between executive equity compensation and the control of cash flow in state-owned listed companies is much weaker than that in non-state-owned listed companies.The contribution of this study was, in the background of accrual system and cash system integration, this paper jumped out of the circle of surplus management to study the relationship between executive compensation and control of cash flow. That could contribute empirical research for the academia; provides a unique perspective for regulators to monitor the behavior of the various illegal manipulation of the cash flow effectively; put forward some certain references for stakeholders of listed company in China when they made decisions and made salary system design by cash flow.