An Analysis of the use of Accounting and Market Measures of Performance in Executive Compensation Contracts

Lambert, Richard A.; Larcker, David F.

doi:10.2307/2491081

Cited by 887 publications

(507 citation statements)

References 44 publications

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“…A substantial body of literature investigates cross-sectional and time-series variation in the voluntary provision of such information (see Healy and Palepu, 2001, for a review of the literature). 21 Thus, in this sub-section we ignore agency problems and focus only on the measurement issues, similar to the approach taken in papers such as Lambert and Larcker (1987) and Sloan (1993). shareholders elect a board of directors to represent their interests in managing the corporation, including the appointment of the management team, its performance assessment, and compensation of the management. The board contracts with a management team to execute the firm's strategy (i.e., strategy formulated by the board on behalf of investors) and manage its dayto-day operations.…”

Section: An All-equity Firm Settingmentioning

confidence: 99%

Implications for GAAP from an analysis of positive research in accounting

Kothari¹,

Ramanna

Skinner

2010

Journal of Accounting and Economics

574

356

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Based on extant literature, we review the positive theory of GAAP. The theory predicts that GAAP's principal focus is on control (performance measurement and stewardship) and that verifiability and conservatism are critical features of a GAAP shaped by market forces. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

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Section: An All-equity Firm Settingmentioning

confidence: 99%

Implications for GAAP from an analysis of positive research in accounting

Kothari¹,

Ramanna

Skinner

2010

Journal of Accounting and Economics

574

356

View full text Add to dashboard Cite

show abstract

“…Economics-based agency models indicate that the choice of performance measures in this setting should be a function of the informativeness (or incremental information content) of each measure regarding the worker's action choices (e.g., Holmstrom 1979). The relative weight placed on an individual measure, in turn, should be a function of the measure's sensitivity (or the change in its mean value in response to a change in the agent's action) and precision (or the inverse of the variance in the measure) (Lambert and Larcker 1987;Banker and Datar 1989).…”

Section: B Informativenessmentioning

confidence: 99%

Determinants of Performance Measure Choices in Worker Incentive Plans

Ittner

Larcker

2002

Journal of Labor Economics

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This study examines the determinants of performance measure choices in worker incentive plans. The results indicate that inform-ativeness issues such as those addressed in economic theories have a significant effect on measurement choices. However, other reasons for adopting the plans, such as upgrading the workforce and linking bonuses to the firm's ability to pay, also influence measurement choices, as do union representation and management participation in plan design. Moreover, the factors influencing the use of specific measures vary, suggesting that the aggregate performance measure classifications commonly used in compensation research provide somewhat misleading inferences regarding performance measurement choices. Disciplines AccountingThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/accounting_papers/79 S58 [ Journal of Labor Economics, 2002, vol. 20 David F. Larcker, University of PennsylvaniaThis study examines the determinants of performance measure choices in worker incentive plans. The results indicate that informativeness issues such as those addressed in economic theories have a significant effect on measurement choices. However, other reasons for adopting the plans, such as upgrading the workforce and linking bonuses to the firm's ability to pay, also influence measurement choices, as do union representation and management participation in plan design. Moreover, the factors influencing the use of specific measures vary, suggesting that the aggregate performance measure classifications commonly used in compensation research provide somewhat misleading inferences regarding performance measurement choices.

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“…Therefore, we expect a positive association between earnings management and the existence of a bonus plan as proxied by cash salary plus bonus (Lambert and Larker (1987); Sloan (1993)). …”

Section: G Control Variables For Other Incentives To Manage Earningsmentioning

confidence: 99%

The Effect of Technical Default Cost on Discretionary Accounting Decisions

Hassabelnaby

Mosebach

et al. 2005

SSRN Journal

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This study investigates whether the variation in the expected costs of technical default leads managers to manipulate earnings in periods prior to, as well as in, the year in which avoidance of technical default becomes unlikely. We argue that managers have private information about the expected costs and consequences of default and, prior to default, condition their decisions about accounting choice and discretion on these expectations. We provide evidence on the endogeneity of two forms of discretion in accounting choices in the context of testing the debt covenant hypothesis. We document that both forms of earnings management are associated with a lower cost of technical default. Our findings also suggest earnings management is less likely when the expected cost of technical default is low, and such decisions are associated with a lower default cost for firms that actually enter technical default.

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An Analysis of the use of Accounting and Market Measures of Performance in Executive Compensation Contracts

Cited by 887 publications

References 44 publications

Implications for GAAP from an analysis of positive research in accounting

Implications for GAAP from an analysis of positive research in accounting

Determinants of Performance Measure Choices in Worker Incentive Plans

The Effect of Technical Default Cost on Discretionary Accounting Decisions

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