CFO Co-Option, Earnings Targets, and CEO Compensation

30 Pages Posted: 17 Aug 2016 Last revised: 17 Apr 2018

See all articles by Shane S. Dikolli

Shane S. Dikolli

Darden School of Business University of Virginia

John C. Heater

Duke University - Fuqua School of Business

William J. Mayew

Duke University - Fuqua School of Business

Mani Sethuraman

Cornell University

Date Written: April 16, 2018

Abstract

We study whether relative power in the CEO-CFO relationship influences CEO compensation. To operationalize relative power of a CEO over a CFO, we define CFO co-option as the appointment of a CFO after a CEO assumes office. We find that CFO co-option is associated with a CEO pay premium of 5.6%, which is partially explained by a higher likelihood that the firm achieves analyst-based earnings targets. Our evidence also indicates that the primary channel through which co-opted CFOs achieve earnings targets is by walking down analyst forecasts over a fiscal year rather than using discretionary accruals to inflate earnings. The evidence thus suggests that co-opted CFOs are more likely to manage expectations about earnings rather than managing earnings directly to achieve earnings targets.

Keywords: CFO, CEO, Executive Compensation, Monitoring, Financial Reporting, Managerial Power, Earnings Management, Expectations Management

JEL Classification: M41, M52, G30

Suggested Citation

Dikolli, Shane Sami and Heater, John C. and Mayew, William J. and Sethuraman, Mani, CFO Co-Option, Earnings Targets, and CEO Compensation (April 16, 2018). Available at SSRN: https://ssrn.com/abstract=2824133 or http://dx.doi.org/10.2139/ssrn.2824133

Shane Sami Dikolli (Contact Author)

Darden School of Business University of Virginia ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

John C. Heater

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1085 (Phone)

HOME PAGE: http://www.johnheater.com

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Mani Sethuraman

Cornell University ( email )

Ithaca, NY 14853
United States

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