CEO Compensation and Fair Value Accounting: Evidence from Purchase Price Allocation

54 Pages Posted: 6 May 2010 Last revised: 10 Jun 2014

See all articles by Ron Shalev

Ron Shalev

University of Toronto - Rotman School of Management

Ivy Zhang

University of California, Riverside

Yong Zhang

Hong Kong Polytechnic University

Date Written: April 1, 2010

Abstract

This study investigates the impact of CEO compensation structure on post-acquisition fair value measurement for acquired entities, a unique event where managers estimate and disclose fair values of various non-financial assets and liabilities. We find that the relative importance of bonuses in a CEO’s pay package is an important determinant of the proportion of purchase price allocated to goodwill, which in turn affects subsequent reported earnings and therefore managers’ bonuses. Further, we find that the use of different accounting-based performance measures for bonus compensation affects managerial accounting choices in the allocation process. When acquirer’s CEO bonus plan includes performance measures that are not affected or less affected by the overstatement of goodwill, such as cash flows, sales, or earnings growth, the over-allocation to goodwill motivated by bonus plans diminishes.

Keywords: CEO Compensation, Performance Measures, Fair Value Accounting

JEL Classification: M41, J33

Suggested Citation

Shalev, Ron and Zhang, Ivy and Zhang, Yong, CEO Compensation and Fair Value Accounting: Evidence from Purchase Price Allocation (April 1, 2010). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1600903 or http://dx.doi.org/10.2139/ssrn.1600903

Ron Shalev

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Ivy Zhang (Contact Author)

University of California, Riverside ( email )

900 University Ave
Riverside, CA 92521
United States

Yong Zhang

Hong Kong Polytechnic University ( email )

Hung Hom
Hung Hom
Kowloon, AK HK HK
Hong Kong

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