Accounting and Economic Consequences of CEO Paycuts

55 Pages Posted: 2 Mar 2018

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Hariom Manchiraju

Indian School of Business (ISB), Hyderabad

Swaminathan Sridharan

Northwestern University - Kellogg School of Management

Date Written: April 8, 2016

Abstract

Boards sometimes cut a CEO’s pay following poor performance. This study examines whether such CEO paycuts really work. We identify 1,496 instances of large CEO paycuts during the period 1994-2013. We then create a propensity-score-matched control group of firms that did not cut their CEOs’ pay and employ a difference-in-differences approach to examine the consequences of paycuts. Our results show that, following a paycut, CEOs are likely to engage in earnings management in an attempt to accelerate improvement in the reported performance and to achieve a speedier restoration of their pay to pre-cut levels. Further, we find that improvement in long-term performance after a paycut occurs only for those firms with lower levels of earnings management after the paycut. Finally, we show that paycuts are more likely to lead to unintended value-destroying consequences in the absence of high institutional ownership or when the CEO is sufficiently entrenched, thereby impairing the effectiveness of internal monitoring by boards.

Suggested Citation

Lobo, Gerald J. and Manchiraju, Hariom and Sridharan, Swaminathan, Accounting and Economic Consequences of CEO Paycuts (April 8, 2016). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3126052

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Hariom Manchiraju (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Swaminathan Sridharan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8807 (Phone)
847-467-1202 (Fax)

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