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Earnings smoothing and CEO cash bonus compensation: the role of mandatory derivatives disclosure policy

  • Abiot Tessema
Original Article
  • 17 Downloads

Abstract

Motivated by intense controversy over mandatory derivative instruments disclosure required by the Statement of Financial Accounting Standard No. 133 (SFAS 133), this study is to examine whether the sensitivity of CEOs compensation to earnings smoothing changes following the adoption of SFAS 133. Moreover, the study investigates whether the sensitivity of CEOs compensation to earnings smoothing after the implementation of SFAS 133 varies with the level of market volatility. Using the correlation between the changes in discretionary accruals and the changes in pre-discretionary income as a measure of earnings smoothing and dollar value of a bonus earned by the CEOs during the year as a measure of CEOs compensation, the empirical evidence reveals that while earnings smoothing and CEOs compensation are positively related, the positive relation is stronger after the adoption of SFAS 133. The study also finds that the positive association between earnings smoothing and CEOs compensation after the adoption of SFAS 133 is larger when the market volatility is higher. This study provides direct evidence on the impact of the adoption of SFAS 133 on the sensitivity of CEO compensation to earnings smoothing and sheds light on current literature on the effects of accounting regulations, earnings smoothing, and compensation plan. Moreover, this study helps standard setters to better understand the trade-off between transparency and compensation plans.

Keywords

Compensation Earnings smoothing SFAS 133 

JEL Classification

G30 G35 G38 

Notes

Acknowledgements

I thank seminar participants at Maastricht University School of Business and Economics, Tilburg University School of Economics and Management, and Zayed University College of Business.

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Copyright information

© Macmillan Publishers Ltd., part of Springer Nature 2018

Authors and Affiliations

  1. 1.Zayed University College of BusinessAbu DhabiUnited Arab Emirates

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