IDEAS home Printed from https://ideas.repec.org/a/kap/jbuset/v153y2018i2d10.1007_s10551-016-3315-3.html
   My bibliography  Save this article

The Effects of Current Income Attributes on Nonprofessional Investors’ Say-on-Pay Judgments: Does Fairness Still Matter?

Author

Listed:
  • Steven E. Kaplan

    (Arizona State University)

  • Valentina L. Zamora

    (Seattle University)

Abstract

The say-on-pay (SOP) regulation in the Dodd-Frank Act (Public L. no. 111–203, H.R. 4173 2010) requires publicly-traded U.S. firms to hold a nonbinding, advisory shareholder vote on executive compensation. Advocates claim that SOP voting gives shareholders a mechanism to hold managers and boards more accountable. Critics contend that SOP votes may simplistically reflect shareholders’ reactions to the overall value of CEO compensation or the firm’s net income. However, based on prior research, we contend that market participants’ SOP votes are likely to consider current income attributes. For example, the market punishes firms that do not meet or beat benchmarks such as analyst earnings expectations, and that shareholders scrutinize the quality of the income sources of firms that consistently meet/beat analyst expectations. We thus expect that more shareholders will provide ‘agree’ SOP votes for a firm that consistently meets/beats analyst forecasts and does so when net income does not include (rather than includes) nonrecurring gains. Further, we consider whether perceptions about the fairness of CEO compensation play a mediating role in the relationship between the interaction of these two current income attributes and SOP votes. Results from an experiment using evening MBA students as participants indicates that the two current income attributes significantly interact with respect to the percentage of agree SOP votes, and that compensation fairness perceptions fully mediate this relationship. Further, the mediating effect of compensation fairness perceptions is robust to including CEO-level and other determinants found in prior research. We conclude with a discussion of our findings and their implications for public policy and research.

Suggested Citation

  • Steven E. Kaplan & Valentina L. Zamora, 2018. "The Effects of Current Income Attributes on Nonprofessional Investors’ Say-on-Pay Judgments: Does Fairness Still Matter?," Journal of Business Ethics, Springer, vol. 153(2), pages 407-425, December.
    • Handle: RePEc:kap:jbuset:v:153:y:2018:i:2:d:10.1007_s10551-016-3315-3
    DOI: 10.1007/s10551-016-3315-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10551-016-3315-3
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10551-016-3315-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dana R. Hermanson & James G. Tompkins & Rajaram Veliyath & Zhongxia (Shelly) Ye, 2012. "The Compensation Committee Process," Contemporary Accounting Research, John Wiley & Sons, vol. 29(3), pages 666-709, September.
    2. Mario Minoja, 2012. "Stakeholder Management Theory, Firm Strategy, and Ambidexterity," Journal of Business Ethics, Springer, vol. 109(1), pages 67-82, August.
    3. Hosmer, LaRue Tone & Kiewitz, Christian, 2005. "Organizational Justice: A Behavioral Science Concept with Critical Implications for Business Ethics and Stakeholder Theory," Business Ethics Quarterly, Cambridge University Press, vol. 15(1), pages 67-91, January.
    4. Ertimur, Yonca & Ferri, Fabrizio & Stubben, Stephen R., 2010. "Board of directors' responsiveness to shareholders: Evidence from shareholder proposals," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 53-72, February.
    5. Murphy, Kevin J. & Sandino, Tatiana, 2010. "Executive pay and "independent" compensation consultants," Journal of Accounting and Economics, Elsevier, vol. 49(3), pages 247-262, April.
    6. Richard H. Thaler & Amos Tversky & Daniel Kahneman & Alan Schwartz, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 647-661.
    7. Cai, Jie & Walkling, Ralph A., 2011. "Shareholders’ Say on Pay: Does It Create Value?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(2), pages 299-339, April.
    8. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    9. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
    10. Brannick, Michael T. & Brannick, Joan P., 1989. "Nonlinear and noncompensatory processes in performance evaluation," Organizational Behavior and Human Decision Processes, Elsevier, vol. 44(1), pages 97-122, August.
    11. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
    12. Rajiv D. Banker & Rong Huang & Ramachandran Natarajan, 2009. "Incentive Contracting and Value Relevance of Earnings and Cash Flows," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 647-678, June.
    13. Dichev, Ilia D. & Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2013. "Earnings quality: Evidence from the field," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 1-33.
    14. Martin, Kenneth J. & Thomas, Randall S., 2005. "When is enough, enough? Market reaction to highly dilutive stock option plans and the subsequent impact on CEO compensation," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 61-83, March.
    15. Maria Joutsenvirta, 2013. "Executive Pay and Legitimacy: Changing Discursive Battles Over the Morality of Excessive Manager Compensation," Journal of Business Ethics, Springer, vol. 116(3), pages 459-477, September.
    16. Allee, Kristian D. & Bhattacharya, Nilabhra & Black, Ervin L. & Christensen, Theodore E., 2007. "Pro forma disclosure and investor sophistication: External validation of experimental evidence using archival data," Accounting, Organizations and Society, Elsevier, vol. 32(3), pages 201-222, April.
    17. Jeffrey R. Cohen & Lori Holder†Webb & David J. Sharp & Laurie W. Pant, 2007. "The Effects of Perceived Fairness on Opportunistic Behavior," Contemporary Accounting Research, John Wiley & Sons, vol. 24(4), pages 1119-1138, December.
    18. Stuart L. Gillan, 2001. "Option‐Based Compensation: Panacea Or Pandora'S Box?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(2), pages 115-128, June.
    19. Steven Kaplan & Janet Samuels & Jeffrey Cohen, 2015. "An Examination of the Effect of CEO Social Ties and CEO Reputation on Nonprofessional Investors’ Say-on-Pay Judgments," Journal of Business Ethics, Springer, vol. 126(1), pages 103-117, January.
    20. Katherine A. Gunny, 2010. "The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 855-888, September.
    21. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    22. Fischer, Paul E. & Gramlich, Jeffrey D. & Miller, Brian P. & White, Hal D., 2009. "Investor perceptions of board performance: Evidence from uncontested director elections," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 172-189, December.
    23. Ron Kasznik & Maureen F. McNichols, 2002. "Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 727-759, June.
    24. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    25. Jeffrey S. Harrison & Douglas A. Bosse & Robert A. Phillips, 2010. "Managing for stakeholders, stakeholder utility functions, and competitive advantage," Strategic Management Journal, Wiley Blackwell, vol. 31(1), pages 58-74, January.
    26. SANJEEV BHOJRAJ & PAUL HRIBAR & MARC PICCONI & JOHN McINNIS, 2009. "Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts," Journal of Finance, American Finance Association, vol. 64(5), pages 2361-2388, October.
    27. Jeffrey Cohen & Gil Manzon & Valentina Zamora, 2015. "Contextual and Individual Dimensions of Taxpayer Decision Making," Journal of Business Ethics, Springer, vol. 126(4), pages 631-647, February.
    28. Sefa Hayibor & Colleen Collins, 2016. "Motivators of Mobilization," Journal of Business Ethics, Springer, vol. 139(2), pages 351-374, December.
    29. Jeffrey R. Cohen & Nonna Martinov Bennie, 2006. "The Applicability of a Contingent Factors Model to Accounting Ethics Research," Journal of Business Ethics, Springer, vol. 68(1), pages 1-18, September.
    30. Kevin Koh & Dawn A. Matsumoto & Shivaram Rajgopal, 2008. "Meeting or Beating Analyst Expectations in the Post†Scandals World: Changes in Stock Market Rewards and Managerial Actions," Contemporary Accounting Research, John Wiley & Sons, vol. 25(4), pages 1067-1098, December.
    31. Brian J. Bushee, 2001. "Do Institutional Investors Prefer Near†Term Earnings over Long†Run Value?," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 207-246, June.
    32. Bolton, Lisa E & Warlop, Luk & Alba, Joseph W, 2003. "Consumer Perceptions of Price (Un)Fairness," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 29(4), pages 474-491, March.
    33. Yonca Ertimur & Fabrizio Ferri & Volkan Muslu, 2011. "Shareholder Activism and CEO Pay," The Review of Financial Studies, Society for Financial Studies, vol. 24(2), pages 535-592.
    34. Van Buren, Harry J., 2001. "If Fairness is the Problem, Is Consent the Solution? Integrating ISCT and Stakeholder Theory," Business Ethics Quarterly, Cambridge University Press, vol. 11(3), pages 481-499, July.
    35. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    36. Libby, Robert & Bloomfield, Robert & Nelson, Mark W., 2002. "Experimental research in financial accounting," Accounting, Organizations and Society, Elsevier, vol. 27(8), pages 775-810, November.
    37. Thomas, Randall S. & Cotter, James F., 2007. "Shareholder proposals in the new millennium: Shareholder support, board response, and market reaction," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 368-391, June.
    38. James A. Ohlson, 2009. "Accounting Data and Value: The Basic Results," Contemporary Accounting Research, John Wiley & Sons, vol. 26(1), pages 231-259, March.
    39. Morgan, Angela G. & Poulsen, Annette B., 2001. "Linking pay to performance--compensation proposals in the S&P 500," Journal of Financial Economics, Elsevier, vol. 62(3), pages 489-523, December.
    40. Fabrizio Ferri & David A. Maber, 2013. "Say on Pay Votes and CEO Compensation: Evidence from the UK," Review of Finance, European Finance Association, vol. 17(2), pages 527-563.
    41. David Yermack, 2010. "Shareholder Voting and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 103-125, December.
    42. Ferdinand A. Gul & Charles J. P. Chen & Judy S. L. Tsui, 2003. "Discretionary Accounting Accruals, Managers' Incentives, and Audit Fees," Contemporary Accounting Research, John Wiley & Sons, vol. 20(3), pages 441-464, September.
    43. Luis Perez-Batres & Jonathan Doh & Van Miller & Michael Pisani, 2012. "Stakeholder Pressures as Determinants of CSR Strategic Choice: Why do Firms Choose Symbolic Versus Substantive Self-Regulatory Codes of Conduct?," Journal of Business Ethics, Springer, vol. 110(2), pages 157-172, October.
    44. Jennifer E. Bethel & Stuart L. Gillan, 2002. "The Impact of the Institutional and Regulatory Environment on Shareholder Voting," Financial Management, Financial Management Association, vol. 31(4), Winter.
    45. Rutledge, Robert W. & Karim, Khondkar E., 1999. "The influence of self-interest and ethical considerations on managers' evaluation judgments," Accounting, Organizations and Society, Elsevier, vol. 24(2), pages 173-184, April.
    46. Morgan, Angela & Poulsen, Annette & Wolf, Jack, 2006. "The evolution of shareholder voting for executive compensation schemes," Journal of Corporate Finance, Elsevier, vol. 12(4), pages 715-737, September.
    47. Jared Harris, 2009. "What’s Wrong with Executive Compensation?," Journal of Business Ethics, Springer, vol. 85(1), pages 147-156, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Steven S. Crawford & Karen K. Nelson & Brian R. Rountree, 2021. "Mind the gap: CEO–employee pay ratios and shareholder say‐on‐pay votes," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(1-2), pages 308-337, January.
    2. Jessica M. Rixom & Mark Jackson & Brett A. Rixom, 2023. "Mandating Diversity on the Board of Directors: Do Investors Feel That Gender Quotas Result in Tokenism or Added Value for Firms?," Journal of Business Ethics, Springer, vol. 182(3), pages 679-697, January.
    3. Martin, Rachel, 2019. "Examination and implications of experimental research on investor perceptions," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 145-169.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ng, Lilian & Sibilkov, Valeriy & Wang, Qinghai & Zaiats, Nataliya, 2011. "Does shareholder approval requirement of equity compensation plans matter?," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1510-1530.
    2. Ferri, Fabrizio & Oesch, David, 2013. "Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay," Working Papers on Finance 1329, University of St. Gallen, School of Finance.
    3. Christopher S. Armstrong & Ian D. Gow & David F. Larcker, 2013. "The Efficacy of Shareholder Voting: Evidence from Equity Compensation Plans," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 909-950, December.
    4. Ng, Jeffrey & Wu, Hong & Zhai, Weihuan & Zhao, Jing, 2021. "The effect of shareholder activism on earnings management: Evidence from shareholder proposals11We appreciate the helpful comments and suggestions from Stephen Taylor, Gary Biddle, Santosh Ramalingego," Journal of Corporate Finance, Elsevier, vol. 69(C).
    5. Morgan, Angela & Poulsen, Annette & Wolf, Jack & Yang, Tina, 2011. "Mutual funds as monitors: Evidence from mutual fund voting," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 914-928, September.
    6. Griffin, Paul A. & Hong, Hyun A. & Liu, Yun & Ryou, Ji Woo, 2021. "The dark side of CEO social capital: Evidence from real earnings management and future operating performance," Journal of Corporate Finance, Elsevier, vol. 68(C).
    7. Chang, Chu-Hsuan & Lin, Hsiou-Wei William, 2018. "Does there prevail momentum in earnings management for seasoned equity offering firms?," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 111-129.
    8. Xia, Jingjing, 2023. "Redrawing the line: Narrowly beating analyst forecasts and journalists’ co-coverage choices in earnings-related news articles," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    9. Stephen J. Smulowitz & Didier Cossin & Hongze Lu, 2023. "Managerial Short-Termism and Corporate Social Performance: The Moderating Role of External Monitoring," Journal of Business Ethics, Springer, vol. 188(4), pages 759-778, December.
    10. Yonca Ertimur & Fabrizio Ferri & David Oesch, 2018. "Understanding Uncontested Director Elections," Management Science, INFORMS, vol. 64(7), pages 3400-3420, July.
    11. Chen, Yangyang & Rhee, S. Ghon & Veeraraghavan, Madhu & Zolotoy, Leon, 2015. "Stock liquidity and managerial short-termism," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 44-59.
    12. Chung, Yu-Hsuan & Pan, Lee-Hsien & Huang, Shaio Yan & Chen, K.C., 2015. "Do firms change earnings management behavior after receiving financial forecast warnings?," Global Finance Journal, Elsevier, vol. 27(C), pages 1-17.
    13. Chen, Wen & Li, Xing & Wu, Haibin & Zhang, Liandong, 2024. "The impact of managerial myopia on cybersecurity: Evidence from data breaches," Journal of Banking & Finance, Elsevier, vol. 166(C).
    14. Zhang, Yiyang & Perols, Johan & Robinson, Dahlia & Smith, Thomas, 2018. "Earnings management strategies to maintain a string of meeting or beating analyst expectations," Advances in accounting, Elsevier, vol. 43(C), pages 46-55.
    15. Manish Kumar & Madhu Vij & Rishabh Goswami, 2021. "Effect of Real Earnings Management on Firm Performance: Evidence from India," Vision, , vol. 27(3), pages 386-396, June.
    16. Al-Shattarat, Basiem & Hussainey, Khaled & Al-Shattarat, Wasim, 2022. "The impact of abnormal real earnings management to meet earnings benchmarks on future operating performance," International Review of Financial Analysis, Elsevier, vol. 81(C).
    17. Vincent Chen & Samuel Tiras, 2015. "‘Other information’ as an explanatory factor for the opposite market reactions to earnings surprises," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 757-784, November.
    18. Sanghyuk Byun & Kristin C. Roland, 2022. "Quarterly earnings thresholds: Making the case for prior quarter earnings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(5-6), pages 690-716, May.
    19. In Ji Jang & Namho Kang, 2024. "ETF and corporate reporting," The Financial Review, Eastern Finance Association, vol. 59(2), pages 293-323, May.
    20. Niszczota Paweł, 2015. "Social Desirability Bias and Earnings Management around the World," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 47(1), pages 56-70, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jbuset:v:153:y:2018:i:2:d:10.1007_s10551-016-3315-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.