Is Accounting Information Quality Priced in Managerial Labor Market?

57 Pages Posted: 15 Jul 2020

See all articles by Yonghong Jia

Yonghong Jia

Iowa State University

Xinghua Gao

Washington State University

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Date Written: June 22, 2020

Abstract

We study whether accounting information quality (AIQ) is priced in the executive labor market. Focusing on externally hired CEO compensation at their initial appointment, we find a 7.38% pay premium for a one-standard deviation decline in AIQ measured in the years preceding the appointment. This result is robust to the inclusion of a comprehensive set of variables reflecting the characteristics of compensation contracts, executives, firms, industries, and states, and three alternative measures of AIQ. Thus our findings are unlikely driven by omitted correlated variables or measurement errors of AIQ. Additional evidence suggests job security concern and accounting failure risk might be the channels to explain the pricing premium for poor AIQ. We also find firms with less effective boards have lower sensitivity of compensation to AIQ, suggesting that private benefits might offset pay premium required by a CEO for low AIQ. Finally, we show the pay premium-AIQ relation is stronger for young CEOs and for CEOs with outside employment restriction, lending further support to the job security mechanism.

Keywords: accounting information quality, CEO compensation, pay premium, job security concern, accounting failure risk.

JEL Classification: M41, J33, D82

Suggested Citation

Jia, Yonghong and Gao, Xinghua and Martin, Xiumin, Is Accounting Information Quality Priced in Managerial Labor Market? (June 22, 2020). Available at SSRN: https://ssrn.com/abstract=3633357 or http://dx.doi.org/10.2139/ssrn.3633357

Yonghong Jia (Contact Author)

Iowa State University ( email )

ames, IA Iowa 50010
United States

Xinghua Gao

Washington State University ( email )

Department of Accounting
Carson College of Business
Pullman, WA 99163
United States

Xiumin Martin

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

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