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Review of Quantitative Finance and Accounting

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31.10.2018 | Original Research

Asymmetric sensitivity of executive bonus compensation to earnings and the effect of regulatory changes

verfasst von: Sung S. Kwon, Jennifer Yin, Gordian A. Ndubizu

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 3/2019

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Abstract

In this paper we examine the sensitivity of CEO bonus to earnings in the cases of good news and bad news, and compare these relationships in the periods before and after SOX. We find an asymmetric sensitivity of bonus to earnings. We also find that the asymmetric sensitivity of bonus to earnings exists before SOX but disappears post SOX. Regulatory changes brought forth by SOX, including personal certifications of financial reporting by CEOs and CFOs, the claw back provision, annual evaluation of internal controls and disclosure of any material weakness, and increased level of conservatism in firms and their auditors after SOX, offer an alternative mechanism to monitor executives, potentially reducing the ex post settling up problem. The findings show that regulatory changes affect compensation contracts and have implications for regulators, managers, politicians, investors, and academics in their assessment of the equitable relationship between executive efforts and executive bonus compensation.

Vorheriger Artikel Trade liberalization and conditional accounting conservatism: evidence from import competition

Nächster Artikel Managerial ability, forecasting quality, and open-market repurchase program completion

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Leone et al. (2006) further note that the ex post settling up problem also exists in other types of CEO compensation, although it is likely to be more severe when payments are made in cash.

https://www.sec.gov/news/press/2011/2011-243.htm.

As in Leone et al. (2006), negative (positive) market-adjusted stock returns are used as a proxy for unrealized losses (gains) or bad (good) news.

Leone et al. (2006) also indicate that if the firm pays the executive a cash bonus for an unrealized gain, but that gain does not later materialize, the executive can quit the firm and the shareholders will have difficulty recovering the cash paid for that unrealized gain.

When we use annual raw return to classify good/bad news firms, the sample consists of 3557 (1775) good news (bad news) firms.

Although not shown in the table, other performance variables, such as ANNMAR, ΔROE, and ΔEPSEIP, are also positively and significantly correlated with ΔBON.

Leone et al. (2006) present their empirical results based only on Fama–MacBeth regression tests.

High level of NOAA indicates low level of conservatism.

For example, as shown in Carters et al. (2009), the NYSE proposed significant rule changes in its listing standards aimed at ensuring independence of directors and strengthening corporate governance practices of listed companies. In October 2002, the NASDAQ followed suit with a similar proposal to strengthen board independence and committee independence.

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Titel: Asymmetric sensitivity of executive bonus compensation to earnings and the effect of regulatory changes
verfasst von: Sung S. Kwon
Jennifer Yin
Gordian A. Ndubizu
Publikationsdatum: 31.10.2018
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 3/2019
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-018-0768-8

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