What Does CEOs' Pay-for-Performance Reveal About Shareholders' Attitude Toward Earnings Overstatements?

78 Pages Posted: 10 Sep 2009 Last revised: 29 Apr 2015

See all articles by Katherine Guthrie

Katherine Guthrie

College of William and Mary - Mason School of Business

Illoong Kwon

Seoul National University

Jan Sokolowsky

Independent

Date Written: April 28, 2015

Abstract

If overstatements were a symptom of the agency conflict, pay-for-performance sensitivities should have increased in response to the additional penalties for misreporting imposed by SOX. Our finding of their decrease is inconsistent with the view that overstatements were an unintended consequence of incentive pay prior to 2002. To corroborate our interpretation, we show that (i) CEO pay-for-performance sensitivities are higher among firms whose shareholders stand to benefit from overstatements; (ii) this cross-sectional relationship weakens significantly after SOX; and (iii) the within-firm decrease in pay-for-performance sensitivity is most pronounced among firms with high pre-SOX shareholder benefits from overstatements.

Keywords: business ethics; CEO incentives; corporate governance; earnings management; executive compensation; financial constraint; firm objectives; institutional investment horizon; pay-for-performance sensitivity; principal-agent; Sarbanes-Oxley Act; shareholder pressure

JEL Classification: G32, G34, J33, L21, M41, M43, M52

Suggested Citation

Guthrie, Katherine and Kwon, Illoong and Sokolowsky, Jan, What Does CEOs' Pay-for-Performance Reveal About Shareholders' Attitude Toward Earnings Overstatements? (April 28, 2015). Available at SSRN: https://ssrn.com/abstract=1471283 or http://dx.doi.org/10.2139/ssrn.1471283

Katherine Guthrie (Contact Author)

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States
7572212832 (Phone)

Illoong Kwon

Seoul National University ( email )

Graduate School of Public Administration
599 Gwanak-ro
Gwanak-gu, Seoul 151-742
Korea, Republic of (South Korea)
82-2-880-8551 (Phone)
82-2-877-2411 (Fax)

HOME PAGE: http://www.albany.edu/~ik325357/

Jan Sokolowsky

Independent ( email )

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