Executive Incentive And Earnings Management Preference

Since the principal-agent problem raised, it has got much of academia and industry attention. In order to alleviate agency conflicts between principal and agent, the company set up an incentive contract which based on accounting performance. The interests between executives and shareholders during the period of contract will be connected together, so that executives pursuit individual interests as well as improve the performance of the company, so this approach is considered the best means of stimulating the behavior of executives. However, due to the nature of rational economic man and incentive contract incompleteness, executives have overall interests of the company may be abandoned with earnings management behavior. In listed companies to implement many of earnings manipulation, the study of existing literature mostly stick accrual earnings management, taking the less real earnings management and earnings management by way of non-recurring gains and losses into account, and the corresponding terms of preference is rarely involved. The current one-sided research, affecting the overall grasp of listed companies earnings management behavior and motivation behind, unable to implement an effective constraint checks and balances, thereby affecting the efficiency of the capital market. This article will expand the way of earnings management into three categories-accrual earnings management, real earnings management and non-recurring earnings. Since the three Earnings management has its inherent characteristics, so there may be some executives conducting appropriate preference. Managerial ownership as another tool in alleviating agency problems, partly due to the shares held by company executives, so that executives in making business decisions more concerned about the long-term interests of the company, not just salary incentive contracts within the time limit, so that conflicts of interest between shareholders and executives to further bridge; on the other hand, the shares held by executives, along with strengthening of its powers, in particular to increase the performance of the right to speak in the accounting identified, which earnings management can be facilitated. Therefore, the managerial ownership might have an impact on earnings management preferences. Based on principal-agent theory and incentive theory, combing the relevant domestic and international literature, using the data of 2007-2013 in Shanghai and Shenzhen A-share listed companies, we found that:(1) The greater currency executive incentive compensation, the more executives prefer to accrual earnings management which can highlight the dominant position of operating profit; in the case of managerial ownership, its executives appetite increased since the accrued earnings management will not cause damage to the future value of companies; in the other case, executives don’t prefer it due to the higher risks of audit and regulatory. (2) The greater currency executive incentive compensation, the more executives prefer to real earnings management which can highlight the dominant position of operating profit; in the case of managerial ownership, the executives will not use the real earnings management because it can damage to future value of the company; in the other case, since the real earnings management is more subtle, more executives prefer using real earnings management. (3) The greater currency executive incentive compensation, the more executives will decrease the non-recurring earnings management because it can reduce the quality of performance; managerial ownership or not does not change the preferences. Conclusions of this paper draws the following recommendations:(1) To improve the executives’currency contracts, and to add non-financial indicators evaluation factors in order to reduce executive motivation of earnings management; (2) The introduction of managerial ownership mechanism should be match to internal and external governance environment and to improve corporate governance and managers’market to effectively prevent a series of questions posed by expansion of executive power.