The Effects of Accounting Conservatism on Executive Compensation

The role of accounting conservatism in executive compensation contracts

Journal of Business Finance &amp Accounting ◽

10.1111/jbfa.12350 ◽

2018 ◽

Vol 45 (9-10) ◽

pp. 1139-1163 ◽

Cited By ~ 8

Author(s):

Takuya Iwasaki ◽

Shota Otomasa ◽

Atsushi Shiiba ◽

Akinobu Shuto

Keyword(s):

Executive Compensation ◽

Accounting Conservatism ◽

Compensation Contracts

Download Full-text

An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity

International Journal of Accounting and Information Management ◽

10.1108/ijaim-01-2018-0002 ◽

2019 ◽

Vol 27 (1) ◽

pp. 130-150 ◽

Cited By ~ 2

Author(s):

Xi Zhang ◽

Simon Gao ◽

Yi Zeng

Keyword(s):

Executive Compensation ◽

Positive Association ◽

Accounting Conservatism ◽

Governance Mechanism ◽

Content Type ◽

Financial Firms ◽

Performance Sensitivity ◽

Moral Risk ◽

Measure Of Performance ◽

The Relationship

Purpose The purpose of this paper is to study the relationship between accounting conservatism and executive compensation-performance sensitivity with a view to identify the influence of accounting conservatism on the efficiency of executive compensation contracts. Design/methodology/approach This study uses multiple regression models based on the approach of Iyengar and Zampelli (2010), Clarkson et al. (2011) and Huang and Kisgen (2013) with the data from all of China’s listed non-financial firms over the period of 10 years to test the relationship between accounting conservatism and the sensitivity of executive compensation-performance. Findings This study finds a positive association between executive compensation and accounting-based measure of performance. More importantly, it reveals that conservatism has a positive relation with the executive compensation-performance sensitivity after controlling for a number of firm-specific factors and control variables. This study shows that the sensitivity of executive compensation to firm performance is higher for firms with higher accounting conservatism. Originality/value This is one of the few studies to examine the relationship between accounting conservatism and executive compensation-performance sensitivity. It provides supportive evidence to the argument that accounting conservatism, being an efficient governance mechanism, can help mitigate information risk and moral risk for agency problems.

Download Full-text