Research On The Influence Of Fair Value Measurement On Executive Compenstion

Followed by fair value accounting (FVA) listed in the "New Enterprise Accounting Standards" in China, many scholars in US blame FVA for amplifying and extending the subprime crisis and severe financial crisis that followed. Under the fair value measurement approach, assets and liability are re-measured periodically to reflect changes in their value, with the resulting change impacting either net income or other comprehensive income for the period. It results the balance sheet is better reflects the current value of assets and liability. In this context, it becomes more difficult to evaluate managerial performance. On the one hand, the division of financial assets, transaction timing and management knowledge are highly associated with market sensitivity; on the other hand, the gain from fair value is also significantly affected by other factors. Therefore, this article attempt to explore whether the application of FVA has influence on executive compensation.By using a sample of all A-share listed companies from 2010 to 2012.The study finds that the changesof fair value has a significantly positive impact on executive compensation.Executivecompensation has a similar sensitivity tothe changes in the fair value and to loss and recurrent earnings. Moreover, the results show the relation betweenfair value loss and executive compensation isinsignificant in whole sample. However, such relationship is significantly positive in the sample of non-state-owned enterprises.Our contributions can be shown in several ways. First, our sample period offers a special context to investigate whether or to what degree FVA affects executive compensation:China’s economy is in the transition period of deepening reform, corporate restructuring and upgrading.Second, the introduction of FVA for the enterprises with different ownershipmight have various effect.To address this issue, this paper will focus on whether enterprises owned by state interplays the relation between FVA and executive compensation. The empirical evidence shows that changes in fair value has a positive impact on executive compensation in the non-state-owned enterprises, but such impact diminishes in the state-owned listed enterprises.