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Research on the Correlation between Fair Value Measurement and Executive Monetary Compensation

Author: ChenMingFei
Tutor: TangMin
School: Southwestern University of Finance and Economics
Course: Accounting
Keywords: Fair Measurement Value Profit and Loss from Fair ValueChanges Executive Compensation Corporate Governance
CLC: F272.92
Type: Master's thesis
Year: 2013
Downloads: 44
Quote: 0
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The problem of Principal-agent can be solved by designing reasonable compensation contracts that can achieve the goals of shareholders and executives and reduce the agency costs.In the current corporate governance, the compensation contracts are designed by the results-compensation mode, using the observed accounting results to measure the contribution of executives to shareholders, and pay the appropriate compensation. With the complexity of the financial instruments held by enterprises the diversification of the investment, part of the accounting performance measured by historical cost can not be reflected, but the comprehensive income concept used in the fair value of re-introduction of the new accounting standards in2007can remedy the deficiency effectively, so we have the necessary to research the correlation between fair value measurement and executive monetary compensation.From the point of view of the financial markets in China, with the development and improvement of China’s capital markets, more enterprises participate in the investment of the financial instruments such as stocks, bonds and financial derivatives. Though the investment of financial assets, the enterprises can make full use of idle assets and increase revenue, but at the same time, benefits always coexist with risks and the investment behaviors can also increase the risk of the enterprises. As business managers, the executives should bear the social responsibility of increasing the value of enterprises, so they take responsibility to the gains and losses on financial instruments of investment. When conducting risk of investment, executives should maintain adequate care and give full consideration to the level of market risk, but the managers don’t analyze the feasibility of the investments and simply increase the performance of accounting by excessive investment under their selfishness.Under the circumstance of defining the related concepts, the research review and analysis relevant literature, and then find the direction, through theoretical analysis, formulating hypotheses, and building a model to study the relationship between the profit and loss from fair value changes and the executive monetary compensation.The results show that the introduction of the fair value in a certain extent affects executive monetary compensation. But in the case of the full sample, listed companies pay more attention to the real surplus to measure the executives’effort. The executive monetary compensation shows asymmetric dynamic adjustment, and increases when the profit and loss from fair value changes is positive, but doesn’t reduce when the profit and loss from fair value changes is negative.In the current compensation contract mechanism, it may lead to excessive investment and blind investment behavior by executives for its own sake, but such investment behavior by the corporate executives also can not effectively constrained though regulations. So the mechanisms of governance of listed companies in China remain to be improved.The contributions of this article:The research stands on the point of view of accounting performance measures, perfects and enriches the theory of contract, and test the economic consequences caused by the application of the fair value. The conclusions have great theoretical significance of improving the disclosure of the financial statements, and promoting the more rational use of fair value accounting. At the same time, the research exposes executives will exhibit irrational investment behavior during the investment of financial asset and provides a point of reference to further improve the corporate governance mechanism.

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CLC: > Economic > Economic planning and management > Enterprise economy > Enterprise planning and management decision - making > Corporate Administration > Personnel Management
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