Split Share Reform, Earnings Management and Executive Compensation

Extant literature shows that corporate compensation arrangement is one of the most important motive to conduct earnings management, but few research provided the empirical evidence. This paper argue that Chinese institutional background have made the compensation-motivated earnings management possible and conduct the empirical test using the Balsam (1998) model with the samples of Chinese listed companies from 2003 to 2007. Empirical results show that the earnings management behavior of listed companies can increase cash compensation of the executive significantly. Further test with the sample reclassified by the property right category suggests that state-controlled companies are more inclined to conduct earnings management to increase the executive compensation. Moreover, after the split share reform, the effect of earnings management on executive compensation is enlarged which is mainly caused by the strengthening of earnings management's effect on executive compensation in non state-controlled companies.