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

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  • Katherine Guthrie

    (College of William and Mary)

  • Illoong Kwon

    (Seoul National University)

  • Jan Sokolowsky

    (Society for Financial Studies)

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.

Suggested Citation

  • Katherine Guthrie & Illoong Kwon & Jan Sokolowsky, 2017. "What Does CEOs’ Pay-for-Performance Reveal About Shareholders’ Attitude Toward Earnings Overstatements?," Journal of Business Ethics, Springer, vol. 146(2), pages 419-450, December.
    • Handle: RePEc:kap:jbuset:v:146:y:2017:i:2:d:10.1007_s10551-015-2891-y
    DOI: 10.1007/s10551-015-2891-y
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    More about this item

    Keywords

    CEO incentive pay; Earnings management; Firm objectives; Pay-for-performance sensitivity; Sarbanes–Oxley Act; Shareholder myopia;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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