Accounting Standards Change, State Ownership And The Application Of Relative Performance Evaluation In Chinese Listed Companies

The separation of ownership and control is the most striking feather in modern enterprise. In order to relief the interest conflicts between principals and managers, efficient executive compensation contracts should be developed according to managers’performance. Holmstrom put forward the theory of relative performance evaluation (RPE) in1982. It can evaluate managers’performance more accuracy. However, the evidences of RPE have not received consistent support from empirical studies. Albuquerque put forward a new method to select peer groups in2009. It has important significance. The Ministry of Finance of China announced the issuance of its new Chinese Accounting Standards on February15,2006. It has achieved the substantive convergence with the International Accounting Standards (IAS). In order to maintain the efficient of executive compensation contracts, the managers’ performance evaluation method should be adjusted in pace with the changing of accounting information environment. This paper use the sample of Shanghai and Shenzhen A-share listed companies’data from2003to2012(exclude2007), consider the state ownership, to investigates the application of RPE, and the impacts of accounting standards changes on the use of RPE in Chinese listed company.We conduct empirical tests of RPE theory in China in the first place, construct peer groups includes companies in the same year, with the same industry and of a similar size according to Albuquerque method (2009). The empirical results are only support the stock return-based RPE in China.Next, we partition the sample into two sub-periods:2003-2006, which represents the pre-changed period, and2008-2012, which represents the post-changed period, and "then investigate the impacts of accounting standards changes on the use of RPE. The results show that companies use not only accounting-based RPE, but also stock return-based RPE in the pre-changed period. In the post-changed period, companies significantly reduce the use of accounting-based RPE, but improve the use of stock return-based RPE. Meanwhile, companies improve the use of their own accounting performance, and reduce the use of their stock return performance. It means if accounting standard change can improves earnings quality, the increased informativeness of earnings for evaluation of management’s effort might reduce the need for the use of RPE to reduce the costs. So the results indirectly prove that the new accounting standards improve the accounting information quality.Consider of unique institutional background, we partition the sample into SOEs (State Owned Enterprises) and non-SOEs (non-State Owned Enterprises). The empirical results show that there is no significant difference between SOEs and non-SOEs by using RPE. They both only use stock return-based RPE. After we partition the sample into two sub-periods, the results show that the SOEs only use accounting-based RPE and non-SOEs didn’t use any of them in the pre-change period. In the post-change period, SOEs reduce the use of accounting-based RPE and improve the use of stock return-based RPE. But non-SOEs further reduce the use of accounting-based RPE and not change the use of stock return-based RPE in significant level. It means accounting standard changes have different impact on different type of company.This paper contributes to the literature in several ways. First, investigate the application of RPE in Chinese listed companies according to Albuquerque method, provides evidence of RPE theory in China.Second, investigate the application of RPE in SOEs and non-SOEs, explore the differences between them in managers’performance evaluation method. It can help to evaluate managers’performance according to state ownership appropriately.Third, in order to promote effective corporate governance, relief the agency problem, we investigate the impacts of accounting standards change on managers’ performance evaluation and compensation contracts from the perspective of the contractual usefulness of accounting information.Fourth, consider of the state ownership, this paper reveals the impacts of accounting standards changes on accounting information quality, and more accurately reflect manager’s efforts. It can help the company to adjust managers’ performance evaluation method in pace with the changing of accounting information environment.Last, this paper indirectly proves that the new accounting standards improve the accounting information quality. It enriches the studies of the impact of accounting standards change to accounting information quality.Prospects for future researches:First, we select peer groups by using the method described by Albuquerque (2009). Consider of our institutional background, future researches can also consider the state ownership to select peer groups.Second, this paper indirectly investigates the impacts of new accounting standards on accounting information quality (comparability), but we can’t conclude the new accounting standards can improve the comparability or not. Future researches can directly investigate it by using variables to calculate the comparability of accounting information (De Franco et al.2011).