Fair Value Accounting and Gains from Asset Securitizations: A Convenient Earnings Management Tool with Compensation Side-Benefits
67 Pages Posted: 17 Sep 2004 Last revised: 15 Mar 2009
Date Written: February 11, 2009
We provide evidence that managers use the discretion afforded by fair-value accounting rules to manage the size of reported securitization gains. We show that the ambiguity allowed in discount rate choice is one way that managers can influence these gains. We investigate whether CEO compensation is less sensitive to securitization gains than to other earnings components in the presence of proxies for how independent (outsiders, females, fewer CEO-selected directors) and informed (financial expertise) directors are. We find weak evidence of less earnings management in firms with more independent boards, but find no evidence that our director characteristics influence CEO pay-sensitivity to the gains. Thus, boards do not appear to intervene and adjust compensation for implementation problems related to fair-value accounting rules for securitizations.
Keywords: securitizations, earnings management, fair value, financial expert, outside directors, reliability, gain
JEL Classification: M41, M45, M45, J33, G29, G34, G39
Suggested Citation: Suggested Citation