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Accounting Information and CEO Compensation: The Role of Cash Flow from Operations in the Presence of Earnings *
Author(s) -
Nwaeze Emeka T.,
Yang Simon S. M.,
Yin Q. Jennifer
Publication year - 2006
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/buqj-8kuq-x2tf-k7t4
Subject(s) - earnings , cash flow , business , chief executive officer , accounting , earnings quality , executive compensation , stock (firearms) , compensation (psychology) , quality (philosophy) , econometrics , monetary economics , economics , finance , accrual , corporate governance , psychology , mechanical engineering , management , psychoanalysis , engineering , philosophy , epistemology
Abstract We examine the role of cash flow from operations (CFO) in chief executive officer (CEO) cash compensation. We predict that CFO is contract‐relevant in the presence of earnings, and more so when (1) the quality of earnings relative to the quality of CFO as a measure of performance is low and (2) the need for CFO as a financing source is high. Our analysis is motivated principally by normative arguments and anecdotes from financial disclosures linking CFO to managerial effort and contracts, notwithstanding the traditional role of earnings in performance measurement. We find that the weight of CFO in the compensation model is positive and significant in the presence of earnings and stock returns. We also find that the relative quality of CFO compared with that of earnings has a positive (negative) impact on the weight of CFO (earnings). We further find that the relative weight of CFO is enhanced substantially when enterprise activities crucially depend on internally generated cash flow. These findings are unaltered when we include CEO age, firm size, and risk in the model and allow the coefficients to vary across industries.