The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation

Xiangyi Zhu

doi:doi:10.11648/j.jfa.20210904.14

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The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation

Xiangyi Zhu

Published in Journal of Finance and Accounting (Volume 9, Issue 4)

Received: 8 July 2021 Accepted: 19 July 2021 Published: 24 July 2021

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Abstract

Innovation is the key factor to improve the competitiveness of company, with large amount of investment and high risk. Therefore, when facing the pressure of profitability, reducing research and development expenditure is a real earnings management method commonly used by top executives. R&D cuts related to real earnings management belongs to the suboptimal decision-making. Various frictions and high adjustment costs in reduction process may lead to the decline of follow-up innovation. Compensation contract is a governance mechanism for the board of directors to motivate and supervise top executives. Based on the study of the impact of real earnings management on innovation, this paper also analyzes how to design a compensation contract to better mobilize the innovation initiative of executives. This paper chooses the data of Chinese A-share listed companies from 2007 to 2019 to test the economic consequences of real earnings management from innovation perspective by using tobit model. The empirical results show that R&D cuts related to real earnings management can obstruct companies’ innovation, top executive performance pay of non-state-owned enterprises has a negative impact on innovation, and equity incentive can encourage state-owned enterprise executives to improve innovation output. The conclusions highlight the potential costs of managerial manipulation of R&D expenditures to alter reported earnings, and can help to formulate economic policies and top executive compensation contracts to promote innovation.

Published in	Journal of Finance and Accounting (Volume 9, Issue 4)
DOI	10.11648/j.jfa.20210904.14
Page(s)	138-144
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Real Earnings Management, Innovation, Performance Pay, Equity Incentive

References

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Xiangyi Zhu. (2021). The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation. Journal of Finance and Accounting, 9(4), 138-144. https://doi.org/10.11648/j.jfa.20210904.14

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ACS Style

Xiangyi Zhu. The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation. J. Finance Account. 2021, 9(4), 138-144. doi: 10.11648/j.jfa.20210904.14

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AMA Style

Xiangyi Zhu. The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation. J Finance Account. 2021;9(4):138-144. doi: 10.11648/j.jfa.20210904.14

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@article{10.11648/j.jfa.20210904.14,
  author = {Xiangyi Zhu},
  title = {The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation},
  journal = {Journal of Finance and Accounting},
  volume = {9},
  number = {4},
  pages = {138-144},
  doi = {10.11648/j.jfa.20210904.14},
  url = {https://doi.org/10.11648/j.jfa.20210904.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20210904.14},
  abstract = {Innovation is the key factor to improve the competitiveness of company, with large amount of investment and high risk. Therefore, when facing the pressure of profitability, reducing research and development expenditure is a real earnings management method commonly used by top executives. R&D cuts related to real earnings management belongs to the suboptimal decision-making. Various frictions and high adjustment costs in reduction process may lead to the decline of follow-up innovation. Compensation contract is a governance mechanism for the board of directors to motivate and supervise top executives. Based on the study of the impact of real earnings management on innovation, this paper also analyzes how to design a compensation contract to better mobilize the innovation initiative of executives. This paper chooses the data of Chinese A-share listed companies from 2007 to 2019 to test the economic consequences of real earnings management from innovation perspective by using tobit model. The empirical results show that R&D cuts related to real earnings management can obstruct companies’ innovation, top executive performance pay of non-state-owned enterprises has a negative impact on innovation, and equity incentive can encourage state-owned enterprise executives to improve innovation output. The conclusions highlight the potential costs of managerial manipulation of R&D expenditures to alter reported earnings, and can help to formulate economic policies and top executive compensation contracts to promote innovation.},
 year = {2021}
}

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TY  - JOUR
T1  - The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation
AU  - Xiangyi Zhu
Y1  - 2021/07/24
PY  - 2021
N1  - https://doi.org/10.11648/j.jfa.20210904.14
DO  - 10.11648/j.jfa.20210904.14
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 138
EP  - 144
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20210904.14
AB  - Innovation is the key factor to improve the competitiveness of company, with large amount of investment and high risk. Therefore, when facing the pressure of profitability, reducing research and development expenditure is a real earnings management method commonly used by top executives. R&D cuts related to real earnings management belongs to the suboptimal decision-making. Various frictions and high adjustment costs in reduction process may lead to the decline of follow-up innovation. Compensation contract is a governance mechanism for the board of directors to motivate and supervise top executives. Based on the study of the impact of real earnings management on innovation, this paper also analyzes how to design a compensation contract to better mobilize the innovation initiative of executives. This paper chooses the data of Chinese A-share listed companies from 2007 to 2019 to test the economic consequences of real earnings management from innovation perspective by using tobit model. The empirical results show that R&D cuts related to real earnings management can obstruct companies’ innovation, top executive performance pay of non-state-owned enterprises has a negative impact on innovation, and equity incentive can encourage state-owned enterprise executives to improve innovation output. The conclusions highlight the potential costs of managerial manipulation of R&D expenditures to alter reported earnings, and can help to formulate economic policies and top executive compensation contracts to promote innovation.
VL  - 9
IS  - 4
ER  -

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Author Information

Xiangyi Zhu

Business School, Shandong University of Technology, Zibo, China

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APA Style

Xiangyi Zhu. (2021). The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation. Journal of Finance and Accounting, 9(4), 138-144. https://doi.org/10.11648/j.jfa.20210904.14

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ACS Style

Xiangyi Zhu. The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation. J. Finance Account. 2021, 9(4), 138-144. doi: 10.11648/j.jfa.20210904.14

Copy | Download

AMA Style

Xiangyi Zhu. The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation. J Finance Account. 2021;9(4):138-144. doi: 10.11648/j.jfa.20210904.14

Copy | Download

@article{10.11648/j.jfa.20210904.14,
  author = {Xiangyi Zhu},
  title = {The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation},
  journal = {Journal of Finance and Accounting},
  volume = {9},
  number = {4},
  pages = {138-144},
  doi = {10.11648/j.jfa.20210904.14},
  url = {https://doi.org/10.11648/j.jfa.20210904.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20210904.14},
  abstract = {Innovation is the key factor to improve the competitiveness of company, with large amount of investment and high risk. Therefore, when facing the pressure of profitability, reducing research and development expenditure is a real earnings management method commonly used by top executives. R&D cuts related to real earnings management belongs to the suboptimal decision-making. Various frictions and high adjustment costs in reduction process may lead to the decline of follow-up innovation. Compensation contract is a governance mechanism for the board of directors to motivate and supervise top executives. Based on the study of the impact of real earnings management on innovation, this paper also analyzes how to design a compensation contract to better mobilize the innovation initiative of executives. This paper chooses the data of Chinese A-share listed companies from 2007 to 2019 to test the economic consequences of real earnings management from innovation perspective by using tobit model. The empirical results show that R&D cuts related to real earnings management can obstruct companies’ innovation, top executive performance pay of non-state-owned enterprises has a negative impact on innovation, and equity incentive can encourage state-owned enterprise executives to improve innovation output. The conclusions highlight the potential costs of managerial manipulation of R&D expenditures to alter reported earnings, and can help to formulate economic policies and top executive compensation contracts to promote innovation.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Real Earnings Management on Innovation: The Role of Top Executive Compensation
AU  - Xiangyi Zhu
Y1  - 2021/07/24
PY  - 2021
N1  - https://doi.org/10.11648/j.jfa.20210904.14
DO  - 10.11648/j.jfa.20210904.14
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 138
EP  - 144
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20210904.14
AB  - Innovation is the key factor to improve the competitiveness of company, with large amount of investment and high risk. Therefore, when facing the pressure of profitability, reducing research and development expenditure is a real earnings management method commonly used by top executives. R&D cuts related to real earnings management belongs to the suboptimal decision-making. Various frictions and high adjustment costs in reduction process may lead to the decline of follow-up innovation. Compensation contract is a governance mechanism for the board of directors to motivate and supervise top executives. Based on the study of the impact of real earnings management on innovation, this paper also analyzes how to design a compensation contract to better mobilize the innovation initiative of executives. This paper chooses the data of Chinese A-share listed companies from 2007 to 2019 to test the economic consequences of real earnings management from innovation perspective by using tobit model. The empirical results show that R&D cuts related to real earnings management can obstruct companies’ innovation, top executive performance pay of non-state-owned enterprises has a negative impact on innovation, and equity incentive can encourage state-owned enterprise executives to improve innovation output. The conclusions highlight the potential costs of managerial manipulation of R&D expenditures to alter reported earnings, and can help to formulate economic policies and top executive compensation contracts to promote innovation.
VL  - 9
IS  - 4
ER  -

Copy | Download