The selection and weighting of performance indicators are of vital importance for an effective compensation contract.We examine the effect of the reclassification of income statement items,caused by China's new Accounting Standards for Business Enterprises(ASBE)in 2007 on the weight adjustment of compensation performance indicators.The results show that the sensitivity of executive pay and investment income increases signifi-cantly after ASBE moves investment income in the income statement from below-the-line of operating income to above-the-line,which indicates that the presentation of income statement items is directly related to the weight of compensation performance indicators.We also find that the earnings persistence of investment income increases significantly after ASBE,which implies that the reclassification of investment income conforms to business practice and al-so performs well.However,the increased sensitivity of executive pay and investment income may induce management's opportunistic investment in finan-cial assets.

This paper investigates the influence of analyst forecasts on firm innovation from behavioral and institutional perspectives. We argue that optimistic analyst revenue forecasts raise firm expectation on feasibility and effectiveness of implementing an innovation strategy, thus prompt firms to invest more in innovation. We also posit that subnational differences in institutional environment in terms of factor market development, intellectual property rights protections, and government corruption all affect firm perception on return on innovation, and consequently moderate firm decision to invest in innovation. These hypotheses are tested using a longitudinal sample of Chinese listed firms between 2003 and 2017. We document that optimistic analyst revenue forecasts increase firm R&D investment intensity. This relationship is stronger when forecast dispersion is small, when firms are in regions with more advanced factor markets, stronger intellectual property protection, and less corrupted government.