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Title: Accounting conservatism and the structure of CEO compensation
Authors: Wen, Yantu
Degree: M.Phil.
Issue Date: 2008
Abstract: Using a large sample of US firms during the period 1993-2005, this study investigates the relation between structures of the CEO compensation package from a management incentive perspective, and accounting conservatism; In other words, this study investigates how the managerial incentives of CEO compensation plans influence conservative accounting policy choices. This paper adopts Basu's (1997) conditional accounting conservatism proxied by stock returns response to bad news relative to good news as a measure of accounting conservatism. There are two types of CEO compensation: one is cash compensation consisting of basic salary and bonus; the other is equity-based compensation comprised of stock options and restricted stock. This study anticipates that firms with larger cash compensation are more conservative and reflect bad news in a timelier manner. In contrast, firms with larger equity-based compensation may encourage CEOs to delay the recognition of bad news for opportunistic reasons. The results of this study show that conditional accounting conservatism varies with the structure of CEO compensation. It provides evidence which is consistent with the view that different managerial incentives affect the choice of accounting conservatism. In particular, when the compensation contract is more incentive-based, the degree of accounting conservatism tends to be lower. Due to the existence of different characteristics of components of the CEO compensation package, this study considers structure of CEO compensation package rather than treats the CEO compensation package as a whole. The interaction between accounting conservatism and different components of CEO compensation is employed as a proxy to measure the degree of accounting conservatism in different elements of CEO compensation. The findings of this thesis show that the coefficients of these interaction terms on accounting conservatism are significantly different for various components of CEO compensation. The coefficient of interaction on accounting conservatism and CEO cash compensation is positive and significant. It implies that accounting is more conservative for CEO cash compensation. While the coefficient of interaction on accounting conservatism and CEO equity-based compensation is negative and significant, this means that accounting conservatism tends to be lower for CEO equity-based compensation than for CEO cash compensation. The results are robust after controlling for firm-specific, manager-specific and industry-specific characteristics. The purpose of this paper is to examine whether firms recognize bad news in a timelier manner than good news and whether to a greater extent under certain components of the CEO compensation. More particularly, when a CEO equity-based compensation contract is the dominant choice, although firms recognize bad news in a timelier manner than they do good news, the timeliness of their doing so is less efficient compared to a cash-based compensation contract. The influence of the structure of CEO compensation on conservative accounting policy choices implies that the compensation committee should consider the relation between components of CEO compensation and conservative accounting policy choices when designing CEO compensation contracts and programs for improving accounting quality.
Subjects: Hong Kong Polytechnic University -- Dissertations.
Chief executive officers -- Salaries, etc.
Accounting -- Management.
Pages: viii, 121 leaves ; 30 cm.
Appears in Collections:Thesis

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