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Earnings Smoothing, Cash Flow Volatility, and CEO Cash BonusSomnath DasUniversity of Illinois at Chicago Keejae P. HongUniversity of North Carolina at Charlotte Kyonghee KimUniversity of Missouri at Columbia March 12, 2012 Abstract: Prior studies generally relate managers’ decisions to smooth earnings to their desire to maximize their overall compensation and to smooth their consumption. However, earnings smoothing could also be driven by the firm’s expected benefits from reporting a smooth earnings stream. Our paper provides empirical support for the latter explanation of earnings smoothing. Specifically, we find that while CEO bonus on average increases with earnings smoothing, the increase is larger when the firm’s cash flow volatility is higher. Further, CEO bonus is shielded from the negative effects of lower earnings arising from the need to report a smoother earnings stream.
Number of Pages in PDF File: 39 Keywords: Earnings smoothing, CEO compensation, cash flow volatility JEL Classification: G30, G35 working papers seriesDate posted: March 14, 2012 ; Last revised: March 26, 2012Suggested CitationContact Information
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