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The use of non-financial performance measures in CEO compensation contracts and stock price crash risk

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  • Young Zik Shin
  • Yong Gyu Lee
  • Myung Seok Park

Abstract

This study examines whether the use of non-financial performance measures (NFPMs) in chief executive officer (CEO) compensation contracts is related to stock price crash risk. The literature on NFPMs suggests that incorporating NFPMs into executive compensation contracts motivates managers to engage less in short-term oriented behaviors such as earnings management, while the literature on crash risk focuses on short-term oriented behaviors, such as bad news hoarding, as the main cause for stock price crashes. Based largely on these literatures, we predict that the use of NFPMs in CEO compensation contracts reduces managers’ tendency to hide bad news primarily by over-estimating accruals, thereby leading to a decline in future crash risk. Consistent with this prediction, we find a negative association between the use of NFPMs and subsequent crash risk. Overall, this study enhances our understanding of stock price implications of incorporating NFPMs into CEO compensation contracts.

Suggested Citation

  • Young Zik Shin & Yong Gyu Lee & Myung Seok Park, 2023. "The use of non-financial performance measures in CEO compensation contracts and stock price crash risk," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 30(2), pages 531-552, March.
    • Handle: RePEc:taf:raaexx:v:30:y:2023:i:2:p:531-552
    DOI: 10.1080/16081625.2020.1787850
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    Cited by:

    1. Liu, Simeng & Wang, Kun Tracy & Walpola, Sonali & Zhu, Nathan Zhenghang, 2024. "CSR contracting and stock price crash risk: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    2. Jing Lu & Guohua Cao & Chuan Lin & Stavros Sindakis & Saloome Showkat, 2024. "Examining the Governance Effect of Institutional Investors on Stock Price Crash Risk," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 9053-9081, June.

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