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

• 成果类型: Article
• 署名作者: Na, Ke; Zhang, Ivy Xiying; Zhang, Yong
• 署名单位: University of California System; University of California Riverside; Hong Kong Polytechnic University
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-022-09729-6
• 发表日期: 2024
• 页码: 809-851
• 关键词: ceo cash compensation; financial accounting information; corporate governance; asymmetric sensitivity; executive-compensation; restructuring charges; positive research; VALUE-RELEVANCE; GAAP; OWNERSHIP

摘要

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.