Accounting Theory Project - Group 3 (Lambert) Intro to findings.pptx

7/24/2019 Accounting Theory Project - Group 3 (Lambert) Intro to findings.pptx

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An Analysis of the Use of Account

Market Measures of Performance tive Compensation Contract

Mok Tsz Chung, Calv

Ho Man La

Law Yiu Han

Tsang Wing Ha

Li !in Y

$hiu $huk !wa


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Introduction

%n&'ou&ion

*+-&iv-s

.akg'oun

M-&hoolog/

H/"o&h-sis

inings

%"lia&ion


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Introduction

How to determine the compensation of the executives

he important limitation of studies is the virtual a!sen

cross"sectional analyses#

$uch as the pro!lems related to the environment

Compensation contracts should !e reflected character

he manager% the firm% and the environment#


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&!'ectives

Attempt to address some of these complexities Employ an analytical agency theory model with respe

ent(s actions

Provide a structure for controlling for other factors

Examine whether the relative use of security market a

ng measures of performance in executive compensati


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)ackground

$ingl- -'io3g-n/

Mo-l

Mul&i-'ioConsi-'a&io

n

3g-n/ Th-o'/

'ovi- insigh&s in&o &h- us- o5 aoun&ing o'

a'k-& nu+-'s as s"-i6 -asu'-s o5"-'5o'an- in o"-nsa&ion on&'a&s

'ovi- a 5'a-wo'k 5o-"i'ial anal/sis

$"-i5/ &h- "'o"-'&i-s o5 va'ia+l-s &ha& a'- '-l-van&ag-n&s "-'5o'an-

un&ional 5o' in5o'a&ion"-'5o'an- va'ia+l-s &o ag-n&s o"-nsa&ion sh-

3 M-ans on&'olling 5o' o&5o' o5 &h- o"-nsa&ion s

Th- anal/sis an 5ous "'o"-'&i-s


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)ackground$ingle"period agency models *Holmstrom +,-.-/0 he 1standard1 agency model

he agent(s action *the amount of effort supplies0 to 2 the cash flo Must rely on measures of the agent(s actions for !oth evaluation and

E#g# his output and other information

E3uation provides guidance regarding the functional form of the relaagent(s compensation and the performance measures x and y

;


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)ackground$ingle"period agency models

;

= > ag-n&s ou&"u&

/ > o&h-'in5o'a&ion

?() >

ag-n&su&ili&/

5un&ion 5o'on-/

a > a

> Lag'ang- ul&i"li-'&ha& s"-i6-s &h- low-'+oun on &h- l-v-l o5-="-&- u&ili&/ &ha&

&h- on&'a& an"'ovi- &o &h- ag-n&

> Lag'ang-ul&i"li-' &ha&-nsu'-s &h-

ag-n&s hoi- o5-:o'& +- in-n&iv-

o"a&i+l-


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)ackground$ingle"period agency models

@A


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)ackground*hold0$ingle"period agency models

E3uation implies that the ratio of the slope coefficients is a function e 1signal"to"noise1 ratios of the two performance varia!les

An increase in either the precision of a performance varia!le or its sgent(s actions

Increase the relative weight the varia!le receives in the compens

4$ignal"to"noise5 ratio 6


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4$ignal"to"noise5 ratio


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)ackgroundMulti"period agency models

Compensation contracts have 1memory1 *e#g#% 8am!ert +,-9:/ and ;o

Compensation will depend on the reali=ations of the performance meriod and prior periods

E3uation expresses optimal Contract

the agent(s utility function is additively separa!le over time

t 6 time

the expected values for the performance measures are conditionens in current and prior reali=ations

the slope coefficients are permitted to depend on the prior reali=a

@ B @


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)ackgroundMulti"period agency models

he slope coefficients *x and y0 are proportional to the time"series aval"to"noise ratios of the performance measures

the slope coefficients for each firm using time"series data for compenerformance and accounting performance

used to analy=e whether the relative weights assigned to securityunting num!ers in compensation contracts are related to the signof these performance varia!les

@ B @A


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Methodology > ?es

n


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Methodology > ?esign

188

29

77

248

%nus&'ial 6's

Da&u'al '-sou'- o' "-&'ol-u"'o-ssing 6's

?&ili&i-s o' &'ans"o'&a&ion o"ani-s

E-&ail o' ho&-l 6's

.anks o' insu'an- o"ani-s

i's in uniFu- inus&'ial g'ou"s

$a"l-

o'+-s annual o"-nsa&ionsu'v-/

inal $a"l- 70 6's%nlu-s a&a on asho"-nsa&ion 5o'

Th- hi-5 -=-u&iv- oG-'(C*)

Y-a's as C* Y-a's wi&h &h- o"an/ Y-a's 1970 &o 197 &h-

valu- o5 sha'-s own- +/&h- C*


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Estimation of the $lope Coefficients oPerformance Measures

Agency theory relevant accounting *varia!le y0

security market *varia!le x0 performance indexes

Increase the compara!ility

express varia!les in terms of rates of return


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,# Measurement &f he Performance!les

A# $ecurity market return *;E0 sum of the firm(s capital gains and dividends divided !y the

e

at the !eginning of the year

) # ;eturn on E3uity *;&E0

the firm(s earnings !efore extraordinary items and discontinations divided !y the average common shareholders( e3uity


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# Measurement &f Compensation

%nlu-s

Casho"-nsa&ion(sala'/ ;

annual +onus) '-"'-s-n&s+-&w--n 80I&o 90I o5 &o&alo"-nsa&ionA

=lu-s

hang-s in &h-valu- o5 &h-anag-'s

holings o5 s&oks&ok o"&ions


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# Measurement &f Compensation

may depend on the structure of the remainder of the r(s wealth

i#e# the relative weight market vs# accounting performance

the manager(s other wealth is tied to the firm(s stock p


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:# )&"C& Estimation

Analytical agency model expressed in e3uation *,D0

estimating regression e3uations

separately for each firm


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;esults &f )&"C& And Multiple ;egon Analysis


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;esults &f )&"C& And Multiple ;egon Analysis

;&E slope ;E slope

cash compensation related to !oth ;E and changes in ;&E


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;esults &f )&"C& And Multiple ;egon Analysis*hold0

relation !etween compensation and ;E and ;&E using standard &8$ multiple regression

more highly associated with differences in accounting han with levels of security market returns


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indings


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Preceding Analysis *Hypotheses0

he relative weight of ;E > ;&E in the cash compensract F

"G noise ratios of;E > ;&E

"Gthe degree to which the firm is in the 1early1 stages oent

"G the extent to which the manager(s other wealth is tieprice


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Correlation Analysis

he Pearson correlations *after applying the logarithmic transformatione proxies

enerally consistent with the hypotheses made

;EA8 C&CE;$F correlation among the underlying constructs

E# ,# A positively related to )%

# C negatively related to ? How it is possi!le if A positively related to )% while the relation C negad to ?B

?ifficult to assess the relation due to the presence of some factors


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8atent @aria!le Analysis

o mitigate the measurement and interpretation pro! 8atent @aria!le $tructural E3uation Model

PE; MI 6 JD K J,&I$E K JAC&;; K J:;&LH K J&


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;esults of the 8atent @aria!le Analy8NJ0

PE; MI 6 JD K J,&I$E K JAC&;; K J:;&LH K Jf

&I$E and ;&LHare significantly negatively correl

;&LH and &HE;constructs are significantly posit

elated

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Accounting Theory Project - Group 3 (Lambert) Intro to findings.pptx