We examine the role of cash flow from operations (CFO) in chief executive officer (CEO) cash compensation. We predict that CFO is contract-relevant in the presence of earnings, and more so when (1) the quality of earnings relative to the quality of CFO as a measure of performance is low and (2) the need for CFO as a financing source is high. Our analysis is motivated principally by normative arguments and anecdotes from financial disclosures linking CFO to managerial effort and contracts, notwithstanding the traditional role of earnings in performance measurement. We find that the weight of CFO in the compensation model is positive and significant in the presence of earnings and stock returns. We also find that the relative quality of CFO compared with that of earnings has a positive (negative) impact on the weight of CFO (earnings). We further find that the relative weight of CFO is enhanced substantially when enterprise activities crucially depend on internally generated cash flow. These findings are unaltered when we include CEO age, firm size, and risk in the model and allow the coefficients to vary across industries.
KeywordsCash flow from operations; Compensation; Earnings JEL Descriptors J3, L2, M41
L'information comptable et la rémunération des chefs de la direction : Le rôle des flux de trésorerie d'exploitation en présence de bénéfices
CondenséLes mesures comptables de la performance sont depuis longtemps utilisées dans les contrats de gestion (voir Pavlik, Scott et Tiessen, 1993, pour une recension des publications sur le sujet). Une mesure comptable de la performance est censée être pertinente à cet égard si elle * Accepted by Michel Magnan. We gratefully acknowledge insightful comments and suggestions by Michel Magnan (associate editor), and two anonymous reviewers. We also benefited from comments
This study reexamines the role of earnings persistence as to understand the incremental value relevance of earnings levels and earnings changes in explaining stock returns in the stock market of U.S. The results show that earnings levels and earnings changes together provide the higher value relevant information than each earnings variable alone in explaining stock returns. An increase in earnings persistence, approximated by different time-serial and firm-specific measures, puts more (less) value relevant weight on earning changes (levels). However, the complementary value relevance between earnings levels and earnings changes is somehow weak, implying that a possibly deteriorating valuation role for earnings levels and earnings changes may occur in the recent years for the U.S. stock market.
This paper examines the relative sensitivity of CEO compensation of both acquiring and acquired firms in the top 30 U.S. largest corporate acquisitions in each year for the period of 2003 to 2012. We find that total compensation and bonus granted to executive compensation for acquired companies, not acquiring companies, are significantly related to the amount of acquisition deal even after the size and firm performance are controlled for. Both acquiring and acquired CEOs are found to make the significantly higher compensation than the matched sample firms in the same industry and calendar year. We also find that executives with higher managerial power, as measured by a lower salary-based compensation mix, prior to a corporate acquisition are more likely to receive a higher executive pay in the year of acquisition. The association between executive compensation and managerial power seems to be stronger for acquired firms than for acquiring firms in corporate acquisition. Overall, our findings suggest that corporate acquisition has higher impacts on executive compensation for acquired firm CEOs than for acquiring firm CEOs.
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