Accounting and economic consequences of CEO paycuts

Gerald J. Lobo, Hariom Manchiraju*, Sri S. Sridharan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1-20
Number of pages20
JournalJournal of Accounting and Public Policy
Volume37
Issue number1
DOIs
StatePublished - Jan 1 2018
Externally publishedYes

Keywords

  • Agency theory
  • Earnings management
  • Executive compensation
  • Pay cut

ASJC Scopus subject areas

  • Accounting
  • Sociology and Political Science

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