Does Improved Disclosure Lead to Higher Executive Compensation? Evidence from the Convergence to IFRS and the Dual-Class Share System in China

Abstract

Exploiting an exogenous disclosure rule change and the unique dual-class share system in China, this study tests whether improved information disclosure leads to higher executive compensation. Consistent with the theoretical prediction in Hermalin and Weisbach (2012), we find that after China adopted a set of tightened accounting and auditing standards in 2007, executive compensation increased by about 15% relative to the control firms. Our results support the argument that, because the better monitoring allowed by increased disclosure tends to affect managers adversely, managerial compensation rises as a compensating differential.

Keywords: information disclosure, executive compensation, accounting standards

JEL Classification: G30, G38