Management Accounting Section Midyear Meeting

Convex Equity Incentives and Accounting Conservatism

• In Event: Break/Research Exhibition 3: Incentives and Cost Management

Abstract

This paper examines whether managers with higher convex equity incentives are more likely to recognize timely loss.
I argue that timely loss recognition exposes managers to negative consequences, and thus convex compensation contracts that limit the negative consequences motivate manager to increase the level of conservatism.
Using CEO's portfolio vega to measure the convexity of equity incentives, I find strong evidence of a positive association between the convexity of equity incentives and the level of conservatism.
Using the current portfolio of segment risk in which the firm operates as an anticipated firm's risk and the price shock from mutual fund outflows as an exogenous unanticipated firm's risk, this paper mitigates the reverse causality critiques and the association between convex equity incentives and the level of conservatism remains positive.
Overall, this study suggests that the mechanism behind the level of accounting conservatism appears to be primary due to risk perspective rather than wealth perspective.

Author

• Hawfeng Shyu, Sun Yat-sen University