Earnings Smoothing, Cash Flow Volatility, and CEO Cash Bonus

39 Pages Posted: 14 Mar 2012 Last revised: 26 Mar 2012

See all articles by Somnath Das

Somnath Das

University of Illinois at Chicago

Philip Keejae Hong

Central Michigan University

Kyonghee Kim

Michigan State University

Date Written: March 12, 2012

Abstract

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

Das, Somnath and Hong, Philip Keejae and Kim, Kyonghee, Earnings Smoothing, Cash Flow Volatility, and CEO Cash Bonus (March 12, 2012). Available at SSRN: https://ssrn.com/abstract=2020463 or http://dx.doi.org/10.2139/ssrn.2020463

Somnath Das

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-4482 (Phone)
312-996-4520 (Fax)

Philip Keejae Hong (Contact Author)

Central Michigan University ( email )

1200 S. Franklin Street
Mt. Pleasnt, MI 48859
United States
9897742593 (Phone)

Kyonghee Kim

Michigan State University ( email )

N206 North Business Complex
632 Bogue Street
East Lansing, MI 48824
United States
517-432-2920 (Phone)

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