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

Author

Listed:
  • Xi Zhang
  • Simon Gao
  • Yi Zeng

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.

Suggested Citation

  • Xi Zhang & Simon Gao & Yi Zeng, 2019. "An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity," International Journal of Accounting & Information Management, Emerald Group Publishing Limited, vol. 27(1), pages 130-150, March.
    • Handle: RePEc:eme:ijaimp:ijaim-01-2018-0002
    DOI: 10.1108/IJAIM-01-2018-0002
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