Management Accounting Section Midyear Meeting

The Consequences of Reporting Earnings Strings for CEOs

• In Event: Top Management and Earnings

Abstract

We investigate how earnings growth patterns over a period of time affect CEO compensation and turnover. We find that a curvilinear (inverted U-shaped) relationship exists between the duration of a string of consecutive earnings increases and CEO total pay, particularly annual cash bonus and stock option awards. The results are consistent with the interpretation that positive earnings strings signal firm growth but only up to an inflection point, after which longer strings could be perceived as unsustainable and likely value diminishing. Negative earnings string duration and the likelihood of CEO termination also follows a curvilinear pattern. Our findings suggest that boards understand earnings growth patterns in making compensation and retention decisions and CEOs are proactively incentivized to focus on long-term future growth during earnings strings.

Authors

• Jagadison K Aier, George Mason University

• Jian Cao, Florida Atlantic University - Boca

• Zhanel DeVides, Penn State University - Abington

• Ki Kyung Song, West Chester University