Financial Reporting Characteristics and Management Compensation: Emphasizing the Role of Information Asymmetry

The expansion and complexity of economic activities and the importance of the role of managers in leading and achieving the strategic goals of companies, has provided the necessary ground for the sensitivity of stakeholders to the management compensation. The main purpose of this study is to investigate the relationship between financial reporting features including the accounting comparability and the financial reporting quality with the management compensation. Besides, the intensity or weakness of this relationship in the context of information asymmetry has also been tested.

For this purpose, 104 companies listed on the Tehran Stock Exchange between 2015 and 2020 have been studied. Data were analyzed using regression analysis.

The results show that the accounting comparability and the financial reporting quality have a positive and significant relationship with the management compensation. However, this relationship is not affected by the information asymmetry environment.

In short, it is concluded that increasing the quality of financial reporting will reduce the agency costs between the firm and stakeholders and its effect is reflected in increasing the compensation paid to managers.

Contribution:

The managers of firm is responsible for preparing the financial statements. Financial reporting characteristics such as financial reporting quality and their comparability can indicate the fulfillment of management tasks, which is considered by users as a positive sign, and in return, the compensation paid to managers increases. In addition, despite explaining the effect of comparability on management compensation in Choi and Sah (2019) research, the innovation of this research is explaining how financial reporting quality affects the compensation of managers.