We investigate whether CEO power influences a firm's decision to change its compensation system in response to regulatory and public pressure. In particular, we assess whether CEO power influences the choice of performance measures as a form of camouflage to minimize the impact of these reforms on their wealth. We examine one component of CEO pay, namely, the use of performance-vested stock option (PVSO) plans, and find that firms with powerful CEOs attach less challenging targets in the initial PVSOs granted to their CEOs. Such firms also appear to adopt PVSO plans early, and are more likely to do so when faced with public outrage over executive compensation. Our results suggest that powerful CEOs attempt to appease public outrage by quickly adopting PVSOs, but that adopting PVSOs early does not appear to be an optimal strategy for increasing shareholder value. Regulators intended that implementation of PVSOs would be beneficial to shareholders by improving the link between CEO pay and firm performance. However, our results indicate that powerful CEOs can negate some of the beneficial effect of PVSOs through their influence on adoption and choice of performance targets. Data Availability: All data used in this study are publicly available from the sources indicated in the paper.

This study examines the sophistication of rating agencies in incorporating managerial risk‐taking incentives into their credit risk evaluation. We measure risk‐taking incentives using two proxies: the sensitivity of managerial wealth to stock return volatility (vega) and the sensitivity of managerial wealth to stock price (delta). We find that rating agencies impound managerial risk‐taking incentives in their credit risk assessments. Assuming other things equal, a one standard deviation increase in vega (delta) will lead to an approximately one‐notch (two‐notch) rating downgrade. In addition, we evaluate the significance of credit ratings in the design of CEO compensation. Our findings suggest that rating‐troubled firms will gear down managerial incentives of risk seeking. In particular, other things equal, a rating downgrade to the lower edge of the investment category (i.e., BBB−) in the immediate prior year will bring about an approximately 51 percent reduction of vega incentive from options newly granted to the CEO in the current year. However, we find no evidence that firms' rating concerns significantly affect delta. Given the significance of credit ratings in the marketplace and their close connection to accounting, the findings of the current study advance our understanding, not only of how sophisticated rating agencies are in incorporating forward‐looking information (i.e., vega and delta) into risk assessments, but of how influential the raters are in changing firms' compensation policies. The findings also have implications on the role of accounting in constraining excessive managerial risk taking with improved disclosures on managerial compensation.

This paper assesses whether reducing 'readability' is an effective obfuscation strategy for influencing the level of shareholder say-on-pay voting dissent in firms with excessive CEO pay. Based on a sample of UK-listed firms, our results indicate that in cases of excessive CEO pay, a less readable remuneration report is associated with reduced say-on-pay voting dissent. However, the effect of the obfuscation strategy diminishes as institutional ownership increases. Using obscurely written remuneration reports may even backfire (i.e. associated with increased voting dissent) when a firm's majority shares are held by institutional investors. Our results are robust to controlling for compensation contract complexity as well as other alternative explanations. The results are also robust to various controls for endogeneity including a two-stage instrumental variable approach and propensity-score matching. Our findings offer regulatory implications that regulators could minimize the use of 'obfuscation' in pay-related disclosures by prescribing how information is to be presented.

SYNOPSIS This study examines the influence of CEO origin on accrual-based earnings management and how these effects evolve over the CEO's tenure in office. Compared with CEOs promoted from within the company, CEOs recruited from outside have a stronger incentive to demonstrate their abilities in the initial years after their appointment; these outside CEOs also may have a lower expectation of surviving the short run. We predict and find that outside CEOs engage in greater income-increasing manipulation in the early years of their tenure. However, the differences in earnings management practices become insignificant after CEOs survive the short run. Our results are robust to a variety of alternative hypotheses and sensitivity checks. The findings thus show that CEO origin is an important factor for explaining financial reporting strategies; they also add to our understanding of CEO origin, managerial horizon problems, and the determinants of aggressive accounting. Data Availability: The data used in this study are publicly available from the sources indicated in the text.