Abstract
This paper examines the effect of mandatory pro forma earnings disclosure on the alignment of CEO share bonuses and firm performance (i.e., annual stock returns). Using 6,583 executive-level observations from 986 non-financial firms in Taiwan over the period 1999–2004, we find a significant shift in the CEO share bonus pay-earnings relation caused by a marked reduction in bonus shares after the new disclosure rule becomes effective. The change in CEO compensation structure in turn leads to a closer link between CEO stock bonuses and annual stock returns. The result suggests that a more transparent earnings disclosure could positively affect board choices regarding compensation arrangements, thus inducing a better convergence of manager and shareholder interests.
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