N'guessan, Kevin-Axel (2022) Reading between the lines of the remuneration report : the effect of executive pay and earnings management. (PhD thesis), Kingston University, .
Abstract
The complexity of corporate financial disclosures has attracted a lot of interest from researchers, especially with the introduction of the International Financial Reporting Standards (IFRS) and other governance-related regulations. The concept of readability, which is one component of complexity, is the focus of this thesis as it relates to the quality and usefulness of the information provided to stakeholders. Thus, the readability of corporate disclosures appears critical as it has repercussions on the judgement and decision process as well as the perception of stakeholders. The readability of corporate financial disclosures could either be used maliciously to intentionally obfuscate or to signal superiority and legitimize the actions of management. In this thesis, I focus on the readability of the financial disclosures (annual report and remuneration report) and how CEO compensation and earnings management are seen as incentives influencing corporate financial disclosures' readability. This thesis is tripartite. The first part investigates the evolution of the readability of the annual reports and CEO compensation. Secondly, this research examines the association between the readability of the remuneration report and the excessive CEO pay. The third part focuses on the link between the readability of the remuneration report and the level of earnings management. The UK FTSE350 Index was chosen as it includes firms with the largest market capitalization. This work covers the years 2011 to 2019 which captures the period around the introduction of the Business Enterprise and Regulatory Reform Act (2013) together with the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (hereafter 2013 Reforms). The analysis suggests that the UK annual reports continue to get more complex and longer as CEOs keep receiving huge pay packages. Moreover, in cases where CEOs are overpaid, a more readable remuneration report is issued in line with the legitimacy theory. Finally, high levels of earnings management result in complex remuneration reports, in line with the obfuscation theory. This study contributes to the literature by firstly extending prior work (Conyon et al., 2006) on the trend of executive pay change over recent times ; it also adds to the literature by investigating the trend in readability over a recent time period in which regulatory reforms in the UK have targeted increased transparency and clarity in remuneration disclosures as a way of enhancing firm-shareholder communication. Secondly, this work extends the existing literature (Laksmana et al., 2012) by investigating the association between excessive compensation and readability in a UK sample over a recent time period. In that context, the 2013 regulatory reforms act as the backdrop allowing me to focus on a period whereby the reporting environment is more open and transparent in terms of remuneration information. Thirdly, this thesis provides novel knowledge by investigating the association between earnings management and remuneration report readability, which has not previously been investigated.
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