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http://dx.doi.org/10.29214/damis.2018.37.2.010

Accounting Conservatism and Excess Executive Compensation  

Byun, Seol-Won (School of Business, Pusan National University)
Park, Sang-Bong (Department of Accounting, Dong-Eui University)
Publication Information
Management & Information Systems Review / v.37, no.2, 2018 , pp. 187-207 More about this Journal
Abstract
This study examines the negative relationship between accounting conservatism and excess executive compensation and examines whether their relationship increases as managerial incentive compensation intensity increases. For this purpose, a total of 2,755 company-years were selected for the analysis of the companies listed on the Korea Stock Exchange from December 2012 to 2016 as the final sample. The results of this study are as follows. First, there is a statistically significant negative relationship between accounting conservatism and manager overpayment. This implies that managers' incentives to distort future cash flow estimates by over booking assets or accounting profits in order to maximize their compensation when manager compensation is linked to firm performance. In this sense, accounting conservatism can reduce opportunistic behavior by restricting managerial accounting choices, which can be interpreted as a reduction in overpayment to managers. Second, we found that the relationship between accounting conservatism and excess executive compensation increases with the incentive compensation for accounting performance. The higher the managerial incentive compensation intensity of accounting performance is, the more likely it is that the manager has the incentive to make earnings adjustments. Therefore, the high level of incentive compensation for accounting performance means that the ex post settling up problem due to over-compensation can become serious. In this case, the higher the managerial incentive compensation intensity for accounting performance, the greater the role and utility of conservatism in manager compensation contracts. This study is based on the fact that it presents empirical evidence on the usefulness of accounting conservatism in managerial compensation contracts theoretically presented by Watts (2003) and the additional basis that conservatism can be used as a useful tool for investment decision.
Keywords
accounting conservatism; excess executive compensation; ex post settling up problem; managerial incentive compensation intensity;
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Times Cited By KSCI : 1  (Citation Analysis)
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