News Column

Researchers from Renmin University of China Detail New Studies and Findings in the Area of Accounting

June 28, 2014



By a News Reporter-Staff News Editor at Investment Weekly News -- Investigators publish new report on Accounting. According to news reporting originating from Beijing, People's Republic of China, by VerticalNews correspondents, research stated, "Survey evidence reveals that managers prefer to avoid dilution of earnings per share (EPS), though financial theory suggests it is irrelevant in firm valuation. We explore contracting and behavioral explanations for this apparent paradox using a large sample of debt-equity issuers."

Our news editors obtained a quote from the research from the Renmin University of China, "We first provide evidence that firms with greater agency conflicts between managers and shareholders are more likely to use EPS as a performance measure in bonus contracts. After controlling for possible endogeneity related to compensation contract design, we find that managers are more likely to avoid earnings dilution when their bonus compensation explicitly depends upon EPS performance. This effect is increasing in the magnitude of bonus compensation for this subset of firms; we document no such associations for the firms that do not use EPS in setting bonus pay. Additional tests of firms' speed of adjustment to target leverage ratios and firms' debt conservatism levels indicate that explicitly rewarding executives on EPS performance helps to resolve underleveraging problems. We also find that clientele effects are associated with managers' aversion to earnings dilution."

According to the news editors, the research concluded: "Our findings provide a deeper understanding of the factors that underlie the use of accounting performance in compensation contracts and new evidence on the implications of the contracting role of accounting in firm decision-making."

For more information on this research see: Why do managers avoid EPS dilution? Evidence from debt-equity choice. Review of Accounting Studies, 2014;19(2):877-912. Review of Accounting Studies can be contacted at: Springer, Van Godewijckstraat 30, 3311 Gz Dordrecht, Netherlands. (Springer - www.springer.com; Review of Accounting Studies - www.springerlink.com/content/1380-6653/)

The news editors report that additional information may be obtained by contacting R. Huang, Renmin Univ China, Sch Business, Beijing 100872, People's Republic of China. Additional authors for this research include C.A. Marquardt and B. Zhang.

Keywords for this news article include: Asia, Beijing, Accounting, People's Republic of China

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Source: Investment Weekly News


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