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CEO Compensation Risk and Timely Loss Recognition

Journal of business finance & accounting, 2015-01, Vol.42 (1-2), p.204-236 [Peer Reviewed Journal]

2015 John Wiley & Sons Ltd ;Copyright Blackwell Publishing Ltd. Jan-Feb 2015 ;ISSN: 0306-686X ;EISSN: 1468-5957 ;DOI: 10.1111/jbfa.12100

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  • Title:
    CEO Compensation Risk and Timely Loss Recognition
  • Author: Brockman, Paul ; Ma, Tao ; Ye, Jianfang
  • Subjects: Accounting ; accounting conservatism ; Accounting procedures ; asset substitution ; Borrowing ; CEO compensation risk ; Chief executive officers ; Compensation ; Costs ; Executive compensation ; Financial accounting standards ; Loss recognition ; Risk management ; Stockholders ; Studies ; timely loss recognition
  • Is Part Of: Journal of business finance & accounting, 2015-01, Vol.42 (1-2), p.204-236
  • Description: Prior studies demonstrate that high CEO compensation risk encourages managers to engage in risk‐seeking behavior, thus intensifying agency conflicts between creditors and borrowers. We argue and document that accounting conservatism plays an important role in mitigating debt holder and shareholder conflicts over asset substitution arising from high CEO compensation risk. Our empirical results show that firms with high CEO compensation risk tend to use more timely loss recognition and this positive relationship is more pronounced for firms with high leverage. Additional results show that the positive relationship between CEO compensation risk and borrowing costs is reduced for firms using timely loss recognition, suggesting that creditors perceive timely loss recognition as a risk‐reducing mechanism. Using the passage of FAS 123R as a quasi‐natural experiment on managerial compensation risk, we find a significant reduction in the use of timely loss recognition for firms experiencing a decrease in CEO compensation risk after the passage of FAS 123R. Lastly, we show that timely loss recognition is positively associated only with the compensation risk of the firm's primary decision maker (i.e., its CEO) and not with the compensation risk of subordinates.
  • Publisher: Oxford: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0306-686X
    EISSN: 1468-5957
    DOI: 10.1111/jbfa.12100
  • Source: Alma/SFX Local Collection
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