CFO Co-Option and CEO Compensation

41 Pages Posted: 17 Aug 2016 Last revised: 9 Jul 2019

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: July 5, 2019

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 about 10%, which is concentrated more in the early years of the co-opted CFO’s tenure and in components of compensation that vary with the achievement of analyst-based earnings targets. Our evidence also indicates that a primary channel through which CEO power over a co-opted CFO yields the achievement of earnings targets is the use of earnings management to inflate earnings. Co-opted CFOs rely primarily on using discretionary accruals to manage earnings prior to the Sarbanes-Oxley regulatory intervention and switch to real activities manipulation afterwards. The evidence thus suggests that the form of earnings management depends on costs imposed on the CFO to inflate earnings.

Keywords: CFO, CEO, Executive Compensation, Monitoring, Financial Reporting, Managerial Power, Earnings 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 and CEO Compensation (July 5, 2019). 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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