CEO Cash Compensation and Earnings Quality

Abstract

I examine the uses of accounting performance measures by testing the association between CEO cash pay sensitivity and earnings quality. I assume that the valuation and evaluation uses of accounting information are linked through the information risk. I expect to find that the sensitivities of CEO cash compensation to accruals and cash flows are associated with accrual quality and cash flow persistence. I find that there is a significant positive relation between accrual quality and CEO cash pay sensitivity to earnings. I find no association between the asymmetric pay-sensitivity to stock returns and earnings quality, and no relation between persistence to pay sensitivity to earnings. This research extends the accounting literature on earnings quality. This research also leads to the discussion of one of the problems of CEO compensation contracting since there appears to be no evidence showing that CEO receives incentives for reporting high quality earnings information and penalties for reporting low quality earnings information.