An Analysis of the Relation Between the Stewardship and Valuation Roles of Earnings

59 Pages Posted: 24 May 2000  

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Ellen Engel

University of Chicago Booth School of Business

Jennifer Milliron

Chicago Partners, LLC

Abbie J. Smith

University of Chicago - Booth School of Business

Date Written: March 2000

Abstract

We develop an agency-based model that provides a direct theoretical connection between compensation-earnings sensitivities (CERCs) and value-earnings sensitivities (ERCs). The model predicts that CERCs are increasing in ERCs. This relation between valuation and stewardship derives from the fact that the capitalization rate of earnings into value also influences the marginal product of current period actions that impact current earnings. Our empirical tests of the model provide evidence of a positive link between CERCs and ERCs, persistence and other agency-based determinants of CERCs from our model. We also conduct an empirical investigation of the existence of secular trends over the 1971-1995 time period in CERCs and in the importance of earnings relative to other information in explaining CEO cash compensation. In contrast to recent studies documenting declining trends in ERCs, we find no general time trend in CERCs. We find, however, a decline in the importance of earnings in explaining cash compensation relative to information reflected in stock returns.

JEL Classification: J33, M41, G12

Suggested Citation

Bushman, Robert M. and Engel, Ellen and Milliron, Jennifer and Smith, Abbie J., An Analysis of the Relation Between the Stewardship and Valuation Roles of Earnings (March 2000). Available at SSRN: https://ssrn.com/abstract=221548 or http://dx.doi.org/10.2139/ssrn.221548

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Ellen Engel (Contact Author)

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-0966 (Phone)
866-377-52152 (Fax)

Jennifer C. Milliron

Chicago Partners, LLC

140 S. Dearborn Street
Suite 1500
Chicago, IL 60603
312-251-5908 (Phone)
312-251-5201 (Fax)

Abbie J. Smith

University of Chicago - Booth School of Business ( email )

1101 East 58th Street
Graduate School of Business
Chicago, IL 60637-1561
United States
773-702-7295 (Phone)
773-702-0458 (Fax)

Paper statistics

Downloads
1,118
Rank
14,163
Abstract Views
4,764