Do Peer Warnings Affect CEO Compensation?

44 Pages Posted: 10 May 2017 Last revised: 9 Aug 2019

See all articles by Masako N. Darrough

Masako N. Darrough

City University of New York - Baruch College - Stan Ross Department of Accountancy

Linna Shi

University of Cincinnati - Lindner College of Business

Ping Wang

Pace University - Lubin School of Business

Date Written: May 10, 2017

Abstract

In this study, focusing on the period 1996-2010, we conduct an empirical investigation of how warnings by industry peer firms about future earnings affect CEO compensation structure. These warnings contain information about the industry, signaling dim industry prospects and possibly triggering negative spillovers on stock prices. We predict that firms respond to industry-wide negative information by changing the compensation mix to make it more future-oriented and by reducing pay-performance sensitivity to shield CEOs from negative factors beyond their control. We find that (1) for firms that issue warnings, peer warnings are associated with a reduction in pay-performance sensitivity; and (2) for firms that do not issue warnings, peer warnings are associated with a modification in compensation mix, such that it becomes more equity-based and future-oriented, similarly to the adjustment made to CEO compensation in the wake of self-warnings. Our results are robust to different definitions of warnings and to the exclusion of annual earnings warnings. However, the results do not hold after 2005, which may be due to factors such as a decline in the use of option compensation, a decrease in the issuance of warnings outside of the announcement window, and changing patterns in management guidance behavior.

Keywords: Relative Performance Evaluation, Information Transfer, Spillover Effect, Management Guidance, Warnings, CEO Compensation

JEL Classification: M41, M52

Suggested Citation

Darrough, Masako N. and Shi, Linna and Wang, Ping, Do Peer Warnings Affect CEO Compensation? (May 10, 2017). Accounting Horizons, Forthcoming; Pace University Accounting Research Paper . Available at SSRN: https://ssrn.com/abstract=2965009

Masako N. Darrough

City University of New York - Baruch College - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way
New York, NY 10010
United States
646 312 3183 (Phone)
646 312 3161 (Fax)

Linna Shi

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States
(513) 556-2097 (Phone)

Ping Wang (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
61
Abstract Views
354
rank
351,596
PlumX Metrics