The effect of financial reporting quality on CEO compensation structure: Evidence from accounting comparability |
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Authors: | Heeick Choi SangHyun Suh |
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Affiliation: | Robert J. Manning School of Business, University of Massachusetts Lowell, USA |
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Abstract: | This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance. |
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Keywords: | Corresponding author. Accounting comparability Compensation structure Equity-based compensation Pay-performance sensitivity Information asymmetry Corporate governance |
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