Earnings Restatements, Changes in CEO Compensation, and Firm Performance

• 成果类型: Article
• 署名作者: Cheng, Qiang; Farber, David B.
• 署名单位: University of Wisconsin System; University of Wisconsin Madison; University of Missouri System; University of Missouri Columbia
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr.2008.83.5.1217
• 发表日期: 2008
• 页码: 1217-1250
• 关键词: investment opportunity set; Option compensation; equity incentives; EMPIRICAL POWER; AGENCY COSTS; STOCK; specification; management; OWNERSHIP; CONSEQUENCES

摘要

Prior research finds that earnings restatements are linked to CEOs' excessive option-based compensation and equity holdings. In this paper, we investigate whether firms that experience earnings restatements recontract with their CEOs to reduce their option-based compensation and if so, whether this leads to improved firm performance. Based on 289 restatement firms over the period 1997-2001, we find that the proportion of CEOs' compensation in the form of options declines significantly in the two years following the restatement, Furthermore, we document that this reduction is accompanied by a decrease in the riskiness of investments, as reflected in lower stock return volatility and subsequent improvements in operating performance. Our results suggest that a decrease in option-based compensation reduces CEOs' incentives to take excessively risky investments, resulting in improved profitability. Overall, our findings provide insights into the design and efficacy of CEO compensation contracts.