Managerial incentives and accounts receivable management policy

Abstract

PurposePrevious research has documented that high vega CEOs increase R&D investment (Coles et al., 2006) and liquidity (Liu and Mauer, 2011), but provided little clue about how those CEOs get the necessary resources to support those choices. Frankel et al. (2016) highlight firms’ compensation incentives to manipulate working capital components, the authors use accounts receivable as an example to illustrate. The paper aims to discuss these issues.Design/methodology/approachThe authors employ sorting, and various regression methods and adjust the Faulkender and Wang (2006) model to test two hypotheses.FindingsThe authors find a negative relation between managerial risk-taking incentives (vega) and accounts receivable and a negative relation between vega and the market value of accounts receivable to shareholders.Research limitations/implicationsThe authors do not compare PPE investment, external financing with accounts receivable to figure out whether accounts receivable is better and more efficient to adjust.Practical implicationsThe evidence primarily supports the internal allocation hypothesis that high vega managers reduce the accounts receivable investment and that the equity market discounts the value of accounts receivable for high vega firms.Social implicationsEquity holders should consider the internal allocation effect when setting CEO compensation incentives, also they should be cautious when CEOs change their accounts receivable management policy. The equity market discounts the value of accounts receivable for high vega firms.Originality/valueThis study provides important information about the CEO compensation incentives, a new explanation about the formation of accounts receivable management policy, and the market value implication of accounts receivable.