What Does CEOs’ Pay-for-Performance Reveal About Shareholders’ Attitude Toward Earnings Overstatements?

Katherine Guthrie (), Illoong Kwon () and Jan Sokolowsky ()
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Katherine Guthrie: College of William and Mary
Jan Sokolowsky: Society for Financial Studies

Journal of Business Ethics, 2017, vol. 146, issue 2, No 11, 419-450

Abstract: Abstract If overstatements were a symptom of the agency conflict, pay-for-performance sensitivities should have increased in response to the additional penalties for misreporting imposed by SOX. Our finding of their decrease is inconsistent with the view that overstatements were an unintended consequence of incentive pay prior to 2002. To corroborate our interpretation, we show that (i) CEO pay-for-performance sensitivities are higher among firms whose shareholders stand to benefit from overstatements; (ii) this cross-sectional relationship weakens significantly after SOX; and (iii) the within-firm decrease in pay-for-performance sensitivity is most pronounced among firms with high pre-SOX shareholder benefits from overstatements.

Keywords: CEO incentive pay; Earnings management; Firm objectives; Pay-for-performance sensitivity; Sarbanes–Oxley Act; Shareholder myopia (search for similar items in EconPapers)
JEL-codes: G32 G34 J33 L21 M41 M52 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10551-015-2891-y

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