| Summary: | 碩士 === 國立中正大學 === 會計學研究所 === 89 === This study investigates whether increases in CEO pay-performance sensitivities (PPS) affect the CEO’s discretionary accounting choices, by examining the relation between PPS and discretionary accruals (DA), where DA are proxies for the aggregate effect of accounting choices on income. We argue that one benefit of increasing accounting income is the consequent increase in pay. Therefore, the higher the correlations between pay and reported income (higher PPS), the more income-increasing accounting choices CEO should make, hence the higher discretionary accruals. After controlling the economic determinants of the PPS and the endogeneity between PPS and DA, we find that the association between CEO pay and reported income has positive and significant influences on discretionary accruals.
Two circumstances are identified where positive discretionary accruals are used to achieve certain performance thresholds. These performance thresholds are defined as (1) zero earnings, when income before discretionary accruals is less than zero; and (2) prior year reported income, when income before discretionary accruals is less than prior year reported income. We find that greater positive discretionary accruals are used to avoid earnings decreases and losses when income before discretionary accruals is less than zero or prior year reported income.
Finally, we argue that CEO has greater incentive to adopt income-increasing discretionary accruals when higher PPS is coupled with losses (or earnings decreases). Our analyses show that only when higher PPS is coupled with earnings decreases can we find positive discretionary accruals becomes significantly greater. In contrast, the discretionary accruals do not demonstrate significant increases when higher PPS is coupled with losses. In our opinion, CEO may prefer to take a bath when higher PPS is coupled with losses.
|
|---|
