Does accounting conservatism pay? |
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Authors: | Raghavan J Iyengar Ernest M Zampelli |
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Institution: | 1. School of Business, North Carolina Central University, Durham, NC, USA;2. Department of Business and Economics, The Catholic University of America, Washington, DC, USA |
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Abstract: | We investigate whether or not there is a link between conservative accounting practices and the sensitivity of executive pay to accounting performance. Using several accrual‐based measures of accounting conservatism as well as alternative measures of accounting performance, we estimate an econometric model of CEO compensation that incorporates the interaction of accounting conservatism and accounting performance. Consistent with optimal contracting theory, we find that the sensitivity of executive pay to accounting performance is higher for firms that report conservative accounting earnings. These results support the hypothesis that accounting conservatism, by limiting earnings management opportunities and improving the reliability of accounting performance measures, allows firms to formulate contracts that tie executive compensation more closely to accounting performance. |
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Keywords: | Executive compensation Accounting conservatism Firm performance C21 J33 M41 |
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