Excess Executive Compensation and the Demand for Accounting Conservatism

Takuya Iwasaki, Shota Otomasa, Atsushi Shiiba and Akinobu Shuto ()
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Takuya Iwasaki: Faculty of Commerce, Kansai University, Japan
Shota Otomasa: Faculty of Commerce, Kansai University, Japan
Atsushi Shiiba: Graduate School of Economics, Osaka University, Japan

No DP2012-08, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: In order to test the implication of Watts's (2003) argument that accounting conservatism can increase the efficiency of executive compensation contracts, we investigate the relationship between the adoption of accounting conservatism and the payment of excess executive compensation in Japanese firms. We focus on the executive compensation practice in Japan because the demand for accounting conservatism is likely to be larger for Japanese firms than it is for U.S. firms because of the lack of explicit compensation contracts in Japan. Consistent with the proposed arguments, we find that accounting conservatism is negatively related to excess cash compensation. We also find that this negative relationship is larger for firms with higher compensation earnings coefficients. These results suggest that the adoption of conservatism in accounting reduces the possibility of managers receiving excess cash compensation and that the demand for accounting conservatism in executive compensation contracts is larger when the ex post settling up problem is more serious.

Keywords: Accounting conservatism; Compensation contract; Excess compensation; Ex post settling up problem; Implicit contract (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2012-03
New Economics Papers: this item is included in nep-bec
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