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CEO Compensation and Fair Value Accounting: Evidence from Purchase Price Allocation
Author(s) -
SHALEV RON,
ZHANG IVY XIYING,
ZHANG YONG
Publication year - 2013
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12015
Subject(s) - goodwill , fair value , earnings , business , asset (computer security) , book value , cash , value (mathematics) , compensation (psychology) , accounting , executive compensation , cash flow , accrual , share price , monetary economics , economics , actuarial science , finance , psychology , corporate governance , computer security , machine learning , computer science , stock exchange , psychoanalysis
This study investigates the impact of CEO compensation structure on post‐acquisition purchase price allocation, an accounting procedure that involves fair value estimation of various assets and liabilities. We find that CEOs whose compensation packages rely more on earnings‐based bonuses are more likely to overallocate the purchase price to goodwill, the largest asset recorded post‐acquisition. Because goodwill is not amortized, the overallocation likely increases post‐acquisition earnings and bonuses. We also find that, when the acquirer's CEO bonus plan includes performance measures that are not affected, or are less affected, by the overstatement of goodwill, such as cash flows, sales, or earnings growth, the overallocation to goodwill motivated by bonus plans diminishes.