This paper investigates the impact of accounting earnings on Chief Executive
Officer (CEO) compensation by examining how the valuation role and the contracting
role of accounting earnings jointly determine the value of CEO total compensation.
Current earnings are informative about the firms future cash flows and hence affect
stock price, and the resulting price movement affects the value of CEO equity-based
compensation. Thus, accounting earnings not only have a direct impact on CEO cash
compensation, but also an indirect impact on CEO equity-based compensation due to
earnings valuation role. To my knowledge, this paper is the first to provide empirical
evidence that because of earnings valuation role, accounting earnings are an
economically significant determinant of CEO total compensation.
Prior accounting research testing predictions of agent theory has focused on CEO
cash compensation even though total compensation is a more relevant measure. Thus,
the significant result of earnings in CEO total compensation enables re-examination of
agency predictions. I provide evidence that earnings (but not stock returns) are used in
CEO total compensation consistent with the sensitivity vs. precision hypothesis. That is, accounting earnings receive less weight when earnings are relatively more volatile
and when firms have significant growth opportunities.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/ETD-TAMU-1395 |
| Date | 15 May 2009 |
| Creators | Cao, Ying |
| Contributors | Omer, Thomas C. |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Dissertation, text |
| Format | electronic, application/pdf, born digital |
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