CFO Co-Option, Earnings Targets, and CEO Compensation
30 Pages Posted: 17 Aug 2016 Last revised: 17 Apr 2018
Date Written: April 16, 2018
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: Suggested Citation