Earnings Versus Price Changes: Delivered Versus Expected Performance
Posted: 9 Sep 1996
Date Written: Undated
Accounting earnings are often criticized for being manipulable by managers. However, earnings-based compensation plans are ubiquitous. Our theoretical model evaluates net cash flows, accounting earnings, and stock prices as potential performance measures and shows that earnings are often better matched with delivered performance than the other two. Thus it provides an explanation for the popularity of earnings-based compensation plans.
JEL Classification: M41, J33
Suggested Citation: Suggested Citation