Does Compensation Disclosure Lead to Better Job Performance? Evidence from the Mandatory CFO Pay Disclosure

Dichu BAO, Lixin Nancy SU, Yong ZHANG

Research output: Other Conference ContributionsConference Paper (other)

Abstract

The 2006 SEC rule, by changing the definition of Named Executive Officers, for the first time mandated the disclosure of CFO compensation. We exploit this setting and use a difference-in-differences research design to study the impact of CFO compensation disclosure on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board and motivating the board to improve CFO compensation contract design, leads to better CFO job performance in providing high-quality financial reports. Analyses support our prediction: The treatment firms, which, under the 2006 rule, start to disclose CFO compensation information, compared to the control firms, which were already disclosing CFO compensation prior to 2006, experience a significant improvement in financial report quality as exhibited in the reduced frequency of both accounting restatements and internal control weaknesses, as well as improved accrual quality. Further strengthening our conclusion, the improvement in CFO performance in financial reporting for the treatment firms is more pronounced for firms with younger CFOs, firms with CFOs subject to weaker internal monitoring, and firms facing higher litigation risk. We contribute to the disclosure literature by showing a causal impact of compensation disclosure on job performance. Our findings also have regulatory implications.
Original languageEnglish
Publication statusPublished - Oct 2018
EventHawai'i Accounting Research Conference: http://manoa.hawaii.edu/harc/wp-content/uploads/2019/01/2019-HARC-Program-D11.pdf - University of Hawai’i at Mānoa, Honolulu, United States
Duration: 2 Jan 20195 Jan 2019

Conference

ConferenceHawai'i Accounting Research Conference
Abbreviated titleHARC 2018
CountryUnited States
CityHonolulu
Period2/01/195/01/19

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Job performance
Disclosure
Monitoring
Prediction
Shareholders
Internal control weaknesses
Contract design
Accounting restatements
Financial reporting
Accrual quality
Research design
Difference-in-differences
Litigation risk

Bibliographical note

We appreciate the helpful comments of Igor Goncharov, Jongwon Park (discussant), Grace Pownall, Katherine Schipper, Feng Tian, Steven Young and participants at the 2018 AFAANZ Annual Meeting and the workshop at Lancaster University. The work described in this paper was partially supported by a grant (General Research Fund 13500517) from the Research Grant Council of the Hong Kong SAR, China.

Cite this

BAO, D., SU, L. N., & ZHANG, Y. (2018). Does Compensation Disclosure Lead to Better Job Performance? Evidence from the Mandatory CFO Pay Disclosure. Paper presented at Hawai'i Accounting Research Conference, Honolulu, United States.
BAO, Dichu ; SU, Lixin Nancy ; ZHANG, Yong. / Does Compensation Disclosure Lead to Better Job Performance? Evidence from the Mandatory CFO Pay Disclosure. Paper presented at Hawai'i Accounting Research Conference, Honolulu, United States.
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BAO, D, SU, LN & ZHANG, Y 2018, 'Does Compensation Disclosure Lead to Better Job Performance? Evidence from the Mandatory CFO Pay Disclosure', Paper presented at Hawai'i Accounting Research Conference, Honolulu, United States, 2/01/19 - 5/01/19.

Does Compensation Disclosure Lead to Better Job Performance? Evidence from the Mandatory CFO Pay Disclosure. / BAO, Dichu; SU, Lixin Nancy; ZHANG, Yong.

2018. Paper presented at Hawai'i Accounting Research Conference, Honolulu, United States.

Research output: Other Conference ContributionsConference Paper (other)

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T1 - Does Compensation Disclosure Lead to Better Job Performance? Evidence from the Mandatory CFO Pay Disclosure

AU - BAO, Dichu

AU - SU, Lixin Nancy

AU - ZHANG, Yong

N1 - We appreciate the helpful comments of Igor Goncharov, Jongwon Park (discussant), Grace Pownall, Katherine Schipper, Feng Tian, Steven Young and participants at the 2018 AFAANZ Annual Meeting and the workshop at Lancaster University. The work described in this paper was partially supported by a grant (General Research Fund 13500517) from the Research Grant Council of the Hong Kong SAR, China.

PY - 2018/10

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N2 - The 2006 SEC rule, by changing the definition of Named Executive Officers, for the first time mandated the disclosure of CFO compensation. We exploit this setting and use a difference-in-differences research design to study the impact of CFO compensation disclosure on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board and motivating the board to improve CFO compensation contract design, leads to better CFO job performance in providing high-quality financial reports. Analyses support our prediction: The treatment firms, which, under the 2006 rule, start to disclose CFO compensation information, compared to the control firms, which were already disclosing CFO compensation prior to 2006, experience a significant improvement in financial report quality as exhibited in the reduced frequency of both accounting restatements and internal control weaknesses, as well as improved accrual quality. Further strengthening our conclusion, the improvement in CFO performance in financial reporting for the treatment firms is more pronounced for firms with younger CFOs, firms with CFOs subject to weaker internal monitoring, and firms facing higher litigation risk. We contribute to the disclosure literature by showing a causal impact of compensation disclosure on job performance. Our findings also have regulatory implications.

AB - The 2006 SEC rule, by changing the definition of Named Executive Officers, for the first time mandated the disclosure of CFO compensation. We exploit this setting and use a difference-in-differences research design to study the impact of CFO compensation disclosure on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board and motivating the board to improve CFO compensation contract design, leads to better CFO job performance in providing high-quality financial reports. Analyses support our prediction: The treatment firms, which, under the 2006 rule, start to disclose CFO compensation information, compared to the control firms, which were already disclosing CFO compensation prior to 2006, experience a significant improvement in financial report quality as exhibited in the reduced frequency of both accounting restatements and internal control weaknesses, as well as improved accrual quality. Further strengthening our conclusion, the improvement in CFO performance in financial reporting for the treatment firms is more pronounced for firms with younger CFOs, firms with CFOs subject to weaker internal monitoring, and firms facing higher litigation risk. We contribute to the disclosure literature by showing a causal impact of compensation disclosure on job performance. Our findings also have regulatory implications.

M3 - Conference Paper (other)

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BAO D, SU LN, ZHANG Y. Does Compensation Disclosure Lead to Better Job Performance? Evidence from the Mandatory CFO Pay Disclosure. 2018. Paper presented at Hawai'i Accounting Research Conference, Honolulu, United States.