Earnings Smoothing, Cash Flow Volatility, and CEO Cash Bonus
39 Pages Posted: 14 Mar 2012 Last revised: 26 Mar 2012
Date Written: March 12, 2012
Prior studies generally relate managers’ decisions to smooth earnings to their desire to maximize their overall compensation and to smooth their consumption. However, earnings smoothing could also be driven by the firm’s expected benefits from reporting a smooth earnings stream. Our paper provides empirical support for the latter explanation of earnings smoothing. Specifically, we find that while CEO bonus on average increases with earnings smoothing, the increase is larger when the firm’s cash flow volatility is higher. Further, CEO bonus is shielded from the negative effects of lower earnings arising from the need to report a smoother earnings stream.
Keywords: Earnings smoothing, CEO compensation, cash flow volatility
JEL Classification: G30, G35
Suggested Citation: Suggested Citation