Accounting and economic consequences of CEO paycuts

Lobo, G and Manchiraju, H and Sridharan, S (2018) Accounting and economic consequences of CEO paycuts. Journal of Accounting and Public Policy, 37 (1). 1 - 20.

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Abstract

Boards sometimes cut a CEO’s pay following poor performance. This study examines whether such CEO paycuts really work. We identify 1,496 instances of large CEO paycuts during the period 1994–2013. We then create a propensity-score-matched control group of firms that did not cut their CEOs’ pay and employ a difference-in-differences approach to examine the consequences of paycuts. Our results show that, following a paycut, CEOs are likely to engage in earnings management in an attempt to accelerate improvement in the reported performance and to achieve a speedier restoration of their pay to pre-cut levels. Further, we find that improvement in long-term performance after a paycut occurs only for those firms with lower levels of earnings management after the paycut. Finally, we show that paycuts are more likely to lead to unintended value-destroying consequences in the absence of high institutional ownership or when the CEO is sufficiently entrenched, thereby impairing the effectiveness of internal monitoring by boards.

Affiliation: Indian School of Business
ISB Creators:
ISB CreatorsORCiD
Manchiraju, HUNSPECIFIED
Item Type: Article
Uncontrolled Keywords: Executive compensation, Pay cut, Earnings management, Agency theory
Subjects: Economics
Depositing User: Veeramani R
Date Deposited: 29 Aug 2018 13:40
Last Modified: 29 Aug 2018 13:40
URI: http://eprints.exchange.isb.edu/id/eprint/585
Publisher URL: https://doi.org/10.1016/j.jaccpubpol.2018.01.002
Publisher OA policy: http://www.sherpa.ac.uk/romeo/issn/0278-4254/
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