Tournament Incentives vs. Equity Incentives of CFOs: The Effect on Firms' Risk Taking and Earnings Management
Description: My dissertation consists of two essays on CFOs' promotion-based tournament incentives and performance-based equity incentives. The first essay examines the joint implications of CFOs' tournament incentives and equity incentives for firms' risk-taking. With the pay gap between the CEO and the CFO as the proxy for the CFO's tournament incentives, I find that the relationship between a firm's risk taking and the CFO's tournament incentives is non-monotonic. In particular, I show that below a certain level, increase in pay gap is associated with increase in firm risk taking (e.g., higher leverage, lower cash holding balance and higher R&D intensity). However, after reaching a certain level, the CEO-CFO pay gap negatively impacts risk-taking, as increase in pay gap is associated with lower leverage, higher cash holding balance and lower R&D intensity. With the CFO's pay-performance sensitivity as the proxy for the CFO's equity incentives, I find that the CFO's equity incentives negatively impact firm's R&D intensity, but have no significant impact on broader financial decisions such as capital structure and cash policy. Collectively, my findings indicate that CFO incentives play an important role in firm's risk-taking behaviors, and the effect of the CFO's tournament incentives is more pronounced. The second essay studies the impact of tournament incentives and equity incentives for CFOs on firms' earnings management, including accrual-based earnings management (e.g., total accruals, abnormal accruals) and real activities manipulation (e.g., abnormal discretionary expenditures, abnormal production costs). Measuring the CFO's tournament incentives as the pay gap between the CEO and the CFO, I show that the CFO's tournament incentives positively influence total accruals and abnormal accruals. Meanwhile, the CFO's equity incentives, measured as the CFO's pay-performance sensitivity, are found positively related to real activities manipulation proxies and total accruals. My findings show a consistent pattern before and after the passage of SOX ...
Date: May 2017
Creator: Han, Feng
Partner: UNT Libraries