Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses

Prior research has found that the market premium for positive unexpected earnings is greater than the penalty for negative unexpected earnings and that the earnings response coefficients for positive (negatie) unexpected earnings are lower (higher) if abnormal accruals are income-increasing. In this...

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Main Authors: CHEN, Chih-Ying, Liang, Jia-Wen, Lin, Stephen W. J.
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Language:English
Published: Institutional Knowledge at Singapore Management University 2007
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Online Access:https://ink.library.smu.edu.sg/soa_research/283
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spelling sg-smu-ink.soa_research-12822010-09-22T09:36:03Z Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses CHEN, Chih-Ying Liang, Jia-Wen Lin, Stephen W. J. Prior research has found that the market premium for positive unexpected earnings is greater than the penalty for negative unexpected earnings and that the earnings response coefficients for positive (negatie) unexpected earnings are lower (higher) if abnormal accruals are income-increasing. In this study, we investigate whether the relation between changes in CEO bonuses and unexpected earnings (the pay-for-performance sensitivity) varies in a manner consistent with the differential market reactions described above. Based on a sample of US firms during 1993-2004, we find that the pay-for-performance sensitivity is higher when unexpected earnings are positive than when they are negative. For observations with small positive unexpected earnings, the pay-for-performance sensitivity is lower if the abnormal accruals are income-increasing. For observations with negative unexpected earnings, the pay-for-performance sensitivity is higher if the abnormal accruals are income-increasing. Further analysis shows that only the observations from the post-Enron period exhibit differential pay-for-performance sensitivities conditional on the sign of the abnormal accruals. Collectively, our results suggest that compensation committees increase the pay-for-performance sensitivity and discount the performance achieved by using income-increasing abnormal accruals in response to increased scruntity of executive compensation. 2007-05-01T07:00:00Z text https://ink.library.smu.edu.sg/soa_research/283 Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University Executive compensation; Earning surprises; Abmornal accruals; Pay-for-performance sensitivity Accounting Corporate Finance
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Executive compensation; Earning surprises; Abmornal accruals; Pay-for-performance sensitivity
Accounting
Corporate Finance
spellingShingle Executive compensation; Earning surprises; Abmornal accruals; Pay-for-performance sensitivity
Accounting
Corporate Finance
CHEN, Chih-Ying
Liang, Jia-Wen
Lin, Stephen W. J.
Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses
description Prior research has found that the market premium for positive unexpected earnings is greater than the penalty for negative unexpected earnings and that the earnings response coefficients for positive (negatie) unexpected earnings are lower (higher) if abnormal accruals are income-increasing. In this study, we investigate whether the relation between changes in CEO bonuses and unexpected earnings (the pay-for-performance sensitivity) varies in a manner consistent with the differential market reactions described above. Based on a sample of US firms during 1993-2004, we find that the pay-for-performance sensitivity is higher when unexpected earnings are positive than when they are negative. For observations with small positive unexpected earnings, the pay-for-performance sensitivity is lower if the abnormal accruals are income-increasing. For observations with negative unexpected earnings, the pay-for-performance sensitivity is higher if the abnormal accruals are income-increasing. Further analysis shows that only the observations from the post-Enron period exhibit differential pay-for-performance sensitivities conditional on the sign of the abnormal accruals. Collectively, our results suggest that compensation committees increase the pay-for-performance sensitivity and discount the performance achieved by using income-increasing abnormal accruals in response to increased scruntity of executive compensation.
format text
author CHEN, Chih-Ying
Liang, Jia-Wen
Lin, Stephen W. J.
author_facet CHEN, Chih-Ying
Liang, Jia-Wen
Lin, Stephen W. J.
author_sort CHEN, Chih-Ying
title Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses
title_short Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses
title_full Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses
title_fullStr Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses
title_full_unstemmed Unexpected Earnings, Abnormal Accruals, and Changes in CEO Bonuses
title_sort unexpected earnings, abnormal accruals, and changes in ceo bonuses
publisher Institutional Knowledge at Singapore Management University
publishDate 2007
url https://ink.library.smu.edu.sg/soa_research/283
_version_ 1770568725754281984