RELATIONSHIP BETWEEN TOP EXECUTIVE COMPENSATION AND ACCOUNTING EARNINGS

Relationship between Top Executive Compensation and Accounting Earnings



Relationship between Top Executive Compensation and Accounting Earnings

Introduction

In order to make justified organizational successes, individual organizations need to make more amends for the purpose and objective of their financial portfolio and at the same time make way for their existence as we see fit. This paper shall incorporate capital structure decisions in the preamble and shall then highlight the relationship between executive compensation and earnings that are visible on the financial books of a particular organization.

Capital Structure

Capital structure implies a combination of funds that meet the overall need of an organization and at the same time help to organization to survive in the overall market. When considering about the most appropriate capital structure decisions that should be undertaken, there is no clear answer to it since every firm's need and demands in terms of monetary assistance and financial support are different in their own ways. For instance, the financial structuring of an advertising campaign shall greatly differ from those of setting up the physical infrastructure of setting up a pharmaceutical or a steel plant at the edge of the city.

When we consider about the amount of capital that should be undertaken when it comes to properly setting up, establishing and initiating the functioning and rolling of an organization, there are two major sources of funds that are generally included as per the context of design the capital structure of an organization. These include debt and equity. Debt implies the funds that are being extended by a financial institution (such as a bank) that help us intended a security or collateral to a bank and then ultimately pay the bank in the form of interest. On the other hand, it is also suggested that individuals who look forward to adopt equity know that this is a source from which individuals look into the sources of funds and monetary backing that is extended by the people or investors or stakeholders joined and considered with the organization.

Efficient Market Hypothesis (EMH): a concept in Finance

When discussing capital structure decision, there are several theories that have been put forth for discussion. The Efficient Market Hypothesis (EMH) implies that organizations residing and functioning in the finance sector are 'data equipped', that is, it implies that market cannot be consistent when it comes to understanding and comprehending the accounts of return in excess on risk-adjusted basis, provided and assumed that industries who have made investments between corporations know about all the necessary data and information disseminated.

Now there are three core implications and hypothesis that are being drawn in terms of financial markets; these include weak, moderate or semi-strong and strong hypothesis. Weak EMH implies that prices set for tangible items and other commodities available on the market already have the impression of past operations and undertaking of all the previous price cuts and settings undertaken; The semi-strong EMH implies both notions that prices of goods reflect all preceding market pricing and ...