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Performance Pay and Credibility of Performance Measurement: Evidence from CEO Incentive Compensation

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Authors
Yeo, Eunjung
Issue Date
2011
Publisher
Graduate School of Public Administration, Seoul National University
Citation
Korean Journal of Policy Studies, Vol.26 No.2, pp. 137-156
Keywords
CEO incentive compensationearnings overstatementstock return sensitivities
Abstract
This paper investigates the credibility of performance measurement from the evidence of a link between CEO incentive compensation and CEOs overstatement of their firms earnings, measured by stock return sensitivities to firms earnings announcements. It empirically analyzes whether the stock market response to announced earnings is positively related to the CEOs performance pay. It appears that stock return sensitivities to firms earnings announcements increased with CEO pay-performance ratio in all earnings categories. Using stock return sensitivities as indicators of a CEOs overstatement of firm earnings, this suggests not only that such overstatements exist, but also that overstatements are more severe among CEOs with high incentive compensation. This suggests that performance measurements based on performance pay are not credible. In
addition to tightening market monitoring, regulatory authorities should develop
measures that can reduce overstatement, such as making CEO compensation better linked to long-term performance, which is more difficult to embellish.
ISSN
1225-5017
Language
English
URI
https://hdl.handle.net/10371/75649
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Graduate School of Public Administration (행정대학원)Dept. of Public Administration (행정학과)Korean Journal of Policy Studies (정책논총, KJPS)Korean Journal of Policy Studies (정책논총) vol.26 no.1-3 (2011)
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