Accounting Information and CEO Compensation: The Role of Cash Flow from Operations in the Presence of Earnings

43 Pages Posted: 22 Nov 2005

See all articles by Emeka T. Nwaeze

Emeka T. Nwaeze

University of Texas - San Antonio; Rutgers Business School - Camden

Simon Yang

Adelphi University

Jennifer Yin

University of Texas at San Antonio

Abstract

We examine the role of cash flow from operations (CFO) in CEO cash compensation. We test 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.

Keywords: Compensation, cash flow from operations, Earnings

JEL Classification: J3, L2, M41

Suggested Citation

Nwaeze, Emeka T. and Yang, Simon and Yin, Jennifer, Accounting Information and CEO Compensation: The Role of Cash Flow from Operations in the Presence of Earnings. Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=853484

Emeka T. Nwaeze (Contact Author)

University of Texas - San Antonio ( email )

Department of Accounting,
One UTSA Circle,
San Antonio, TX 78249-0632
United States
(210) 458-7462 (Phone)
(210) 458-4322 (Fax)

Rutgers Business School - Camden

227 Penn Street
Camden, NJ 08102
United States
609-225-6651 (Phone)
609-225-6231 (Fax)

Simon Yang

Adelphi University ( email )

Garden City, NY 11530
United States

Jennifer Yin

University of Texas at San Antonio ( email )

Department of Accounting
San Antonio, TX 78249
United States
210-458-7090 (Phone)
210-458-4322 (Fax)

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