Is conservatism demanded by performance measurement in compensation contracts? Evidence from earnings measures used in bonus formulas

Ke Na (), Ivy Xiying Zhang () and Yong Zhang ()
Additional contact information
Ke Na: Cheung Kong Graduate School of Business
Ivy Xiying Zhang: University of California, Riverside
Yong Zhang: Hong Kong Polytechnic University

Review of Accounting Studies, 2024, vol. 29, issue 1, No 23, 809-851

Abstract: Abstract We explore the informational properties of earnings that compensation contracting requires for performance measurement. While conditional conservatism could be desirable because it can help to alleviate agency conflicts, its downside relates to the trade-off between conservatism and other important properties, such as persistence. We infer boards’ performance measurement preferences from a novel dataset of earnings realizations used to calculate executive bonus payouts (which we label compensation earnings), which can be either GAAP or non-GAAP. On average, compensation earnings do not exhibit any conditional conservatism in the full sample. The lack of conservatism holds even in subsamples with strong corporate governance and subsamples with high ex ante agency costs, suggesting optimal contract design rather than opportunism. Finally, our analyses indicate that compensation earnings are more persistent and informative than GAAP earnings. Overall our results suggest that boards trade off conservatism for other properties in measuring performance for executive compensation.

Keywords: Conditional conservatism; Performance measurement; Compensation contracting (search for similar items in EconPapers)
JEL-codes: G30 J33 M41 (search for similar items in EconPapers)
Date: 2024
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-022-09729-6 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09729-6

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-022-09729-6

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().