Fair Value Accounting and Gains from Asset Securitizations: A Convenient Earnings Management Tool with Compensation Side-Benefits

Posted: 5 Nov 2009

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

Accounting rules for valuing retained interest from securitizations require management to make assumptions concerning discount rates, default rates, and prepayment rates. These assumptions provide management with discretion to determine the “gain on sale” of the receivables. 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. Overall, out results do not suggest that better “monitoring” reduces earnings management or CEO pay-sensitivity to reported securitization gains. Our results suggest that CEOs are rewarded for the gains they report and boards do not intervene.

Keywords: securitizations, fair value, earnings management, financial expertise, outside directors, gains, asset derecognition

JEL Classification: M41, G12, G34

Suggested Citation

Dechow, Patricia and Myers, Linda A. and Shakespeare, Catherine, Fair Value Accounting and Gains from Asset Securitizations: A Convenient Earnings Management Tool with Compensation Side-Benefits (2009). Journal of Accounting & Economics (JAE), 2009. Available at SSRN: https://ssrn.com/abstract=1492637

Patricia Dechow

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Catherine Shakespeare (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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