Empirical Study Of The Impact Of Institutional Investors’ Heterogeneity On The Relationship Between Earnings Management And Executive Compensation

Corporate governance issues raised by principal-agent have always been a hotissue of academic research, but also long-term and difficult issues have not beeneffectively addressed. Separation of ownership and management rights lead toconflicts of interest of shareholders and senior managers, senior managers tends tomake some personal interests that harm the interests of shareholders of the company.In the principal-agent problem, the executive incentive is the most important, whileimperfect executive compensation incentive system of corporate governance is themost prominent problem. If the listed company’s executive compensation incentives isunscientific, whether institutional investors take positive action for the developmentand improvement of executive compensation incentive system to intervene.According to the principle of cost-benefit analysis, institutional investors after thecompany’s earnings executive compensation mechanism to intervene obtained morethan they pay the costs, institutional investors will be willing to take positive action toinfluence executive compensation mechanisms.Nearly three decades, institutional investors in the capital markets continue togrow and become an emerging force in the financial sector. Institutional investorsaccounted for the outstanding shares of a listed company’s shares is also growing,more and more institutional investors is becoming the top ten shareholders of listedcompanies, providing a glimmer of hope to solve this difficult problem. Institutionalinvestors as the company’s external governance structure, their active participation ingovernance of listed companies to optimize the company’s internal governancestructure, and further promote executives work, thus improving the company’sperformance. At present, in China’s capital market, institutional investors havesecurities investment funds, insurance companies, pension funds, QFII, annuity, etc., these institutional investors have different investment objectives and duration. Theeffects of all types of institutional investors on corporate earnings managementsignificantly are different. This article is based on institutional investors andinvestment company if there is an existing or potential business relationships andpolicy restrictions on their investment behavior, and combined with China’s owncharacteristics on the basis of institutional investors will be classified aspressure-resistant institutional investors and pressure-sensitive institutional investors.This paper selects the statistics of companies in A-share market and SME boardof Shanghai and Shenzhen between2007and2013as samples, in-depth study of theimpact of institutional investors’ heterogeneity on the relationship between executivecompensation and earnings management. The empirical results show that institutionalinvestors as professional investment institutions can find problems in corporategovernance structure and take actively participate in improving the corporategovernance structure, to a certain extent, also significantly increase the salaries ofexecutives’ level. At the same time, institutional investors will strengthen supervisionof executive earnings management behavior, and inhibit excessive executiveremuneration received from earnings management behavior. The study results showthat the introduction of institutional investors can strengthen the supervision of seniormanagers’ earnings management behavior, which have great theoretical and practicalsignificance to solve the principal-agent problem, ensure the interests of investors,and improve the efficiency of social resource allocation.