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

Xi Zhang, Simon Gao and Yi Zeng

International Journal of Accounting & Information Management, 2019, vol. 27, issue 1, 130-150

Abstract: 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 ofIyengar and Zampelli (2010),Clarksonet al.(2011)andHuang 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.

Keywords: Accounting conservatism; Firm performance; Corporate governance; Executive compensation; Agency problem; Executive compensation-performance sensitivity (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijaimp:ijaim-01-2018-0002

DOI: 10.1108/IJAIM-01-2018-0002

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