The Role of Accounting Conservatism in Executive Compensation Contracts

Journal of Business Finance and Accounting, Forthcoming

57 Pages Posted: 17 Mar 2012 Last revised: 5 Aug 2018

See all articles by Takuya Iwasaki

Takuya Iwasaki

Kansai University

Shota Otomasa

Kansai University

Atsushi Shiiba

Osaka University

Akinobu Shuto

University of Tokyo - Graduate School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2018

Abstract

To test the implication of Watts’ (2003) argument that accounting conservatism increases the efficiency of executive compensation contracts, we investigate the relationship between accounting conservatism and earnings-based executive compensation contracts in Japanese firms. We focus on Japanese executive compensation practices because the demand for accounting conservatism is likely to be larger for Japanese than U.S. firms because of the predominance of earnings-based executive compensation contracts and lack of explicit compensation contracts in Japan. Consistent with our arguments, we find a positive relationship between accounting conservatism and the compensation earnings coefficient. Furthermore, this positive relationship is greater for firms with poor ex-ante information environment. These results suggest that the demand for accounting conservatism is higher for firms that use more earnings-based executive compensation contracts and have more serious ex post settling up problems.

Keywords: accounting conservatism, compensation contract, compensation earnings coefficient, information environment, ex post settling up problem

JEL Classification: M41

Suggested Citation

Iwasaki, Takuya and Otomasa, Shota and Shiiba, Atsushi and Shuto, Akinobu, The Role of Accounting Conservatism in Executive Compensation Contracts (July 1, 2018). Journal of Business Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2024827 or http://dx.doi.org/10.2139/ssrn.2024827

Takuya Iwasaki

Kansai University ( email )

3-3-35 Yamatecho
Osaka, 564-8680
Japan
81-6-6368-1239 (Phone)
81-6-6369-7704 (Fax)

Shota Otomasa

Kansai University ( email )

3-3-35 Yamatecho
Osaka, 564-8680
Japan

Atsushi Shiiba

Osaka University ( email )

1-7 Machikaneyama
Toyonaka, Osaka 560-0043
Japan

Akinobu Shuto (Contact Author)

University of Tokyo - Graduate School of Economics ( email )

Hongo, 7-3-1
Bunkyo-ku
Tokyo, 1130033
Japan

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