Abstract
We examine the effect of IFRS (International Financial Reporting Standards) on the type of performance measures firms use to evaluate and reward their managers. We show that post-IFRS firms decrease the weight of Earnings-per-Share (EPS)-based performance measures in CEO pay contracts. We argue that IFRS add “noise” to accounting numbers which, based on optimal contracting theory, makes reported earnings less useful for evaluating managerial performance. Our findings suggest that while under IFRS accounting earnings could be more informative for valuation purposes, this might be achieved at the expense of other purposes that accounting serves, i.e., stewardship/performance contracting.
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