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CEO departure and discretionary accounting choices
Title
CEO departure and discretionary accounting choices.
Creator
Mortimer, John William, Florida Atlantic University, Hopwood, William S.
Abstract/Description
Dechow and Sloan [1991] investigate the hypothesis that CEOs, during their final years of office (the "horizon" years), manage discretionary expenditures to improve short-term earnings performance. Using a sample of 261 firm-years, this study extends the Dechow and Sloan model by including additional control variables. It also examines whether the discretionary components of earnings (discretionary accruals, discretionary revenue, and capital expenditures) provide departing CEOs a monetary...
Show moreDechow and Sloan [1991] investigate the hypothesis that CEOs, during their final years of office (the "horizon" years), manage discretionary expenditures to improve short-term earnings performance. Using a sample of 261 firm-years, this study extends the Dechow and Sloan model by including additional control variables. It also examines whether the discretionary components of earnings (discretionary accruals, discretionary revenue, and capital expenditures) provide departing CEOs a monetary incentive (bonuses) to manipulate these income factors. The general results of this study do not support the hypothesis that departing CEOs have a greater monetary incentive than incumbent CEOs to manage discretionary earnings to maximize their bonus schemes. A possible reason this hypothesis is not supported may be due to the fact that previous research has treated incumbent and departing CEOs as separate, homogeneous samples a treatment that the extant income-smoothing and CEO turnover research suggests may be flawed. Income smoothing literature provides evidence that some incumbent CEOs manipulate earnings to a predetermined target to avoid a "ratcheting" of expectations while CEO turnover research suggests that the "relay" process mitigates some departing CEOs' manipulations of earnings. Since agency theory predicts that management of accounting earnings will vary between groups of incumbent and departing CEOs, as well as within these two groups, the present study partitions the sample on the median change in operating cash flows for departing CEOs. This study finds evidence that departing CEOs in the above-median partition do increase income-enhancing discretionary accruals in their final year with the firm, and they have a significant economic incentive to do so. However, there is apparently no economic incentive for departing CEOs with an above-median change in operating cash flows to reduce discretionary revenue or capital expenditures.
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Date Issued
2001
PURL
http://purl.flvc.org/fcla/dt/11974
Subject Headings
Chief Executive Officers--Salaries, etc, Accrual Basis Accounting, Disclosure in Accounting, Incentives in Industry
Format
Document (PDF)
link between CEO compensation, CEO resource allocation decisions, and firm performance
Title
The link between CEO compensation, CEO resource allocation decisions, and firm performance.
Creator
Dahmus, Sue Ann., Florida Atlantic University, Golden, Peggy A.
Abstract/Description
The relationship between the compensation (total and percent at risk) of 240 CEOs from 1986 to 1991, and several CEO resource allocation decisions (R&D, advertising, employees, business segments, and acquisitions) and subsequent firm performance was explored. The firms (Forbes-CEOs of the largest 800 public companies) had the same CEO for the entire period. The resource allocation decisions and the measures of firm performance (ROA, ROE, ROI, ROS, cashflow/sales, and stock return) were...
Show moreThe relationship between the compensation (total and percent at risk) of 240 CEOs from 1986 to 1991, and several CEO resource allocation decisions (R&D, advertising, employees, business segments, and acquisitions) and subsequent firm performance was explored. The firms (Forbes-CEOs of the largest 800 public companies) had the same CEO for the entire period. The resource allocation decisions and the measures of firm performance (ROA, ROE, ROI, ROS, cashflow/sales, and stock return) were obtained from COMPUSTAT. The number of acquisitions was obtained from Mergers and Acquisitions. The percent of CEO compensation at risk was found to be associated with the change in R&D and the change in the number of business segments. Total CEO compensation was found to be positively associated with the change in advertising expenses, the change in the number of employees, and the change in the number of acquisitions. A principal components analysis indicated that the performance measures loaded on two factors, representing firm profitability and returns to stockholders. The relationship between CEO compensation and firm performance was explored using two stage simultaneous equations. The model considered the effects of prior firm performance on the relationship. The amount of total CEO compensation and the percent of CEO compensation at risk were found to be positively associated with subsequent firm profitability for several years. Total CEO compensation and the percent of CEO compensation at risk were positively associated with subsequent return to stockholders in one year. However, the results were not consistent across all the years of the study and the amounts of firm performance explained by the models were small.
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Date Issued
1994
PURL
http://purl.flvc.org/fcla/dt/12393
Subject Headings
Chief executive officers--Salaries, etc--United States, Executives--Salaries, etc--United States, Incentives in industry--United States, Executive ability, Industrial productivity--Evaluation
Format
Document (PDF)