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Abstract
This paper investigates whether high CFO or CEO compensation follows earnings management practices in Chinese public firms in the private sector. We find that while accrual-based earnings management does not impact executive compensation, real earnings management leads to high executive compensation. In addition, the effect of real earnings management is particularly strong for CEO pay, consistent with the notion that CEO pressure is the key driver of earnings management. Moreover, we find that this association is more pronounced for firms with a powerful CEO as well as for firms with a large wedge between control and cash flow rights.
Acknowledgements
We acknowledge the comments and suggestions of an anonymous referee. We are grateful to participants at the 15th China Economics Annual Conference as well as the 2016 World Finance Conference for helpful comments.
Notes
1. The Wall Street Journal, July 10, 2015.
2. The data on CFO and CEO pay and board members, as well as the data on the variables needed to calculate the measures of earnings management are incomplete prior to 2006. The data for 2006 are excluded, as the structural reform program aiming to eliminate non-tradable shares from 2005 to 2006 may have a large effect on firms’ financial data (Xia and Zhang Citation2008).
3. If a listed company’s net profits were negative in two consecutive fiscal years, it will receive a ST designation, meaning that the company is under special treatment. If a listed company’s net profits were negative in three consecutive fiscal years, it will receive a *ST designation, meaning that the company is under a delisting risk warning.
4. To save space, the correlations are not reported.
5. To save space, the results for these regressions are not reported, but are available upon request.