Abstract
International Financial Reporting Standards (IFRS) allow firms to record adjustments (gains or losses) from the revaluation of investment properties in their income statements. After Hong Kong converged to IFRS in 2005, property companies were required to move their revaluation gains and losses (RGL) from equity to income. We find RGL to be a significant determinant of executive compensation in these firms after 2005, but not before. We further find evidence that the RGL-compensation association is consistent with the prediction of management opportunism. First, the level of compensation is not penalized by revaluation losses. Second, the RGL-compensation association is significant among firms with more severe agency problems, such as firms in which the controlling shareholders own a relatively small percentage of shares, firms in which the controlling shareholders have control rights that exceed ownership rights, and firms that are no longer run by their founders.
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