Research On The Relation Of The Earnings Management,Executive Compensation Incentive And Corporate Value

Modern executive compensation incentives include both short-term incentives and long-term incentives. The combination of the two incentives are considered as effective measures to alleviate the agency conflicts. On the one hand, due to the close relationship between the executive compensation and corporate earnings, executives have motivation to adjust earnings through earnings management to maximize their own interests, so the relationship between earnings management and executive compensation is one of the issues discussed in this paper. On the other hand, whether modern executive compensation incentives can enhance corporate value and whether earnings management executives can effectively enhance corporate value are another two issues discussed in this paper.To explore these issues, firstly the papers presented five hypothesis on the basis of a full and deep theoretical analysis about the relationship of earnings management, executive compensation incentives and corporate value. Secondly the paper selects the cross section data of the listed companies (385 in all) in Shanghai and Shenzhen A share market in 2010-2012. The paper takes the natural logarithm of average top three executives’ monetary compensation as proxy variable of executives’ monetary compensation; the average executives’ ownership percentage as proxy variable of executives’ equity incentive; the discretionary accruals calculated by the modified cross section Jones model as the proxy variable of the earning management of the listed companies; the Tobin Q value in the annual report of the enterprises as the proxy variable of corporate value. Thirdly, the paper builds five linear regression model and conducts empirical analysis on relationship of earnings management, executive compensation incentives and corporate value by employing OLS regression analysis. Finally, this paper presents the related policies and advice on account of the research output the author has achieved.The research findings indicate:executives’ monetary compensation and earnings management present significant positive correlation; executives’ ownership percentage and earnings management present not significant positive correlation; executives’ monetary compensation and corporate value present an inverted U-shaped relationship, which means with the increasing of executives’ monetary compensation, corporate value increases firstly and then reduced after reaching the highest point; executives’ equity incentive and corporate value present an inverted U-shaped relationship, which means with the increasing of executives’ ownership percentage, corporate value increases firstly and then reduced after reaching the highest point; earnings management and corporate value present an inverted U-shaped relationship, which means with the increasing of earnings management, corporate value increases firstly and then reduced after reaching the highest point. Finally, earnings management, executive compensation incentives and corporate value are brought into a unified framework, aiming to find the optimal level of earnings management, executives’ monetary compensation and executives’ownership percentage to maximize corporate value.