Earnings smoothing and CEO cash bonus compensation: The role of mandatory derivatives disclosure policy
Document Type
Article
Source of Publication
International Journal of Disclosure and Governance
Publication Date
5-1-2018
Abstract
© 2018 Macmillan Publishers Ltd., part of Springer Nature. Motivated by intense controversy over mandatory derivative instruments disclosure required by the Statement of Financial Accounting Standard No. 133 (SFAS 133), this study is to examine whether the sensitivity of CEOs compensation to earnings smoothing changes following the adoption of SFAS 133. Moreover, the study investigates whether the sensitivity of CEOs compensation to earnings smoothing after the implementation of SFAS 133 varies with the level of market volatility. Using the correlation between the changes in discretionary accruals and the changes in pre-discretionary income as a measure of earnings smoothing and dollar value of a bonus earned by the CEOs during the year as a measure of CEOs compensation, the empirical evidence reveals that while earnings smoothing and CEOs compensation are positively related, the positive relation is stronger after the adoption of SFAS 133. The study also finds that the positive association between earnings smoothing and CEOs compensation after the adoption of SFAS 133 is larger when the market volatility is higher. This study provides direct evidence on the impact of the adoption of SFAS 133 on the sensitivity of CEO compensation to earnings smoothing and sheds light on current literature on the effects of accounting regulations, earnings smoothing, and compensation plan. Moreover, this study helps standard setters to better understand the trade-off between transparency and compensation plans.
DOI Link
ISSN
Publisher
Palgrave Macmillan Ltd.
Volume
15
Issue
2
First Page
115
Last Page
127
Disciplines
Business
Keywords
Compensation, Earnings smoothing, SFAS 133
Scopus ID
Recommended Citation
Tessema, Abiot, "Earnings smoothing and CEO cash bonus compensation: The role of mandatory derivatives disclosure policy" (2018). All Works. 1360.
https://zuscholars.zu.ac.ae/works/1360
Indexed in Scopus
yes
Open Access
no