Abstract
Based on 1575 firms-year observations from French companies listed on the Paris stock exchange from 2009 to 2017, this research study investigates the linkage between accounting conservatism and highest-paid chief executive officers (CEOs) and if this linkage increases as executive remuneration-performance sensitivity increases. The study’s findings show that there is a negative association between accounting conservatism and highest-paid CEOs. These findings suggest that the highest-paid CEOs can manage and restrict managerial accounting choices for their own gains, and, in turn, this has a negative effect on accounting conservatism. Firstly, in order to achieve generally discretionary goals, they distort the accounting figures by overvaluing their companies’ gains. Secondly, the negative linkage between accounting conservatism and highest-paid CEOs increases when they receive greater remuneration incentives for accounting performance. These findings indicate that powerful CEOs are incentivized to adjust earnings since the greater incentives help them to inflate their companies’ accounting results; to distort accounting performance, and provide investors with misleading information. In turn, such actions generate the ex-post settling up problems and end, unfortunately, in fraudulent behaviors. This study contributes to the literature that studies the relationship between accounting conservatism and the highest-paid senior executives in order to identify accounting conservatism (Iwasaki, Otomasa, Shiiba, & Shuto, 2018; Li, Henry, & Wu, 2019; Haider, Singh, & Sultana, 2021).
Highlights
Over the last two decades, critics of corporate governance in the US have claimed that chief executive officers (CEOs) in public companies are overpaid (Martin, Wiseman, & Gomez-Mejia, 2019)
The study’s findings show that there is a negative association between accounting conservatism and highest-paid CEOs. These findings suggest that the highest-paid CEOs can manage and restrict managerial accounting choices for their own gains, and, in turn, this has a negative effect on accounting conservatism
Based on the above arguments, this study’s second hypothesis is as follows: H2: Accounting conservatism has a negative effect on CEO compensation, which increases with higher senior executive compensation-performance sensitivity
Summary
Over the last two decades, critics of corporate governance in the US have claimed that CEOs in public companies are overpaid (Martin, Wiseman, & Gomez-Mejia, 2019). Using a sample data of 1575 company-year observations over 9 years from 2009 to 2017, this study seeks to explore whether accounting conservatism (which flows from stronger corporate governance) has an effect on senior executives’ compensation. While other studies have explored this relationship in other countries and for specific compensation types (Li et al, 2019), this is the first study that investigates the linkage between accounting conservatism and senior executives’ compensation to identify the accounting conservatism’s impact on the overpayment of the companies’ CEOs. The study hopes to contribute to the literature on the positive effects of strong corporate governance mechanisms and their effect in alleviating the conflicts of interests between senior executives and shareholders.
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