Troubled Asset Relief Program’s Impact on Earnings informativeness: A Study of Compensation Contracts

Carlos Jimenez, Jay Vega and Jennifer Yin ()
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Jennifer Yin: UTSA

Working Papers from College of Business, University of Texas at San Antonio

Abstract: In late 2008, Congress signed the Emergency Economic Stabilization ACT (EESA) into law in order to help bring financial stability into the U.S. economy. The Troubled Asset Relief Program (TARP), which was a part of EESA, was developed specifically to deal with the uncertainty in the U.S. financial institutions. TARP required firms to adhere to specific compensation requirements or face direct costs. We examine if the compensation restrictions that TARP placed on compensation affected the weight investors attach to firms’ earnings. We find that firms that pay their CEOs above the TARP threshold show higher earnings informativeness. We also find that firms that decrease total compensation during their participation in TARP produce more informative earnings, relative to firms that do not decrease total compensation. Separating total compensation into its cash and performance-based components, we find that firms have higher earnings informativeness when they increase (decrease) cash (performance) compensation during TARP. However, earnings informativeness decreases as a whole during and after TARP relative to pre-TARP earnings informativeness. Lastly, we find that firms that pay their CEOs above the threshold set by the U.S. Treasury show higher performance based on accounting measures during their participation in TARP. Length: 40 pages

Keywords: compensation; contracts (search for similar items in EconPapers)
JEL-codes: M52 (search for similar items in EconPapers)
Date: 2015
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