An Exploratory Analysis of Cash Holdings and Pay-Performance Sensitivity before and after IFRS Adoption

This paper documents an association between firms’ cash holdings and CEO’s pay performance sensitivity. Controlling whether CEOs are both president, firm size, leverage, auditor specialization and the ratio of independent board, we find that firms with more cash holdings are more likely to constrain executives’ pay-performance sensitivity than firms with less cash holdings do. Empirical evidence also shows a increasing pay-performance sensitivity after adopting IFRS in China. The changes of the fair value for investment property are recognized from the equity to income statement may influence executives contract. After using propensity score matching research design, we further find that decreasing sensitive compensation due to firms with great corporate cash holdings is more pronounced after IFRS adoption than before IFRS adoption. The results support alignment hypothesis, which argues that managers with high incentive compensation will engage to making risky decisions which may harm firms’ value in the future. Therefore, compensation committee should redesign managers’ compensation contract for limiting their risk-taking behavior. Compare with pre-IFRS period, firms maintaining sufficient liquidity are more likely to decrease CEOs’ incentive compensation for avoiding them pursuing real activities manipulation during post-IFRS period.