Chief financial officer co-option and chief executive officer compensation
We study whether relative power in the chief executive officer (CEO)–chief financial officer (CFO) relationship influences CEO compensation. To operationalize relative power of a CEO over a CFO, we define CFO co-option as the appointment of a CFO after a CEO assumes office. We find that CFO co-option is associated with a CEO pay premium of about 10%, which is concentrated more in the early years of the co-opted CFO’s tenure and in components of compensation that vary with the achievement of analyst-based earnings targets. Our evidence also indicates that a primary channel through which CEO power over a co-opted CFO yields the achievement of earnings targets is the use of earnings management to inflate earnings. Co-opted CFOs rely primarily on using discretionary accruals to manage earnings prior to the Sarbanes–Oxley regulatory intervention and switch to real-activities manipulation afterward. The evidence thus suggests that the form of earnings management depends on costs imposed on the CFO to inflate earnings.
Dikolli, SS; Heater, JC; Mayew, WJ; Sethuraman, M
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