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

Nwaeze, Emeka T.; Yang, Simon; Yin, Qin

doi:10.1506/buqj-8kuq-x2tf-k7t4

Cited by 64 publications

(45 citation statements)

References 78 publications

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“…Baber, Kang, and Kumar (1998) find a stronger absolute pay-for-performance relation between cash compensation changes and unexpected earnings for more persistent earnings, while Nwaeze, Yang, and Yin (2006) document that the weight placed on earnings relative to operating cash flow is lower for firms with lower earnings persistence, higher earnings variability, and higher total accruals. Gaver, Gaver, and Austin (1995) find that transitory gains are included in earnings for compensation purposes while transitory losses are excluded.…”

Section: Consequences Of Earnings Quality For Compensationmentioning

confidence: 99%

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Dechow¹,

2010

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Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work. Over the years, researchers have devised various measures of "earnings quality" to represent decision usefulness in specific decision contexts. These measures, however, have become proxies for "earnings quality" in a generic sense, absent a decision context. The result is that some papers use a proxy for earnings quality that does not match the hypothesized form of decision usefulness in their study, but they nonetheless find results that are consistent with their hypothesis. Other papers are intentionally agnostic and find robust results across multiple proxies for earnings quality. The fact that researchers find consistent and robust results across proxies suggests that there is common component to the various measures of quality, which is the firm's fundamental earnings process. Existing research does not clearly distinguish the impact of a firm's fundamental earnings process on the decision usefulness ("quality") of its earnings from the impact of the application of accounting measurement to that process. Research attention has focused on earnings management that reduces the reliability of earnings rather than on the ability of specific features of an accrual-based accounting system to provide a more decision-useful measure, conditional on the firm's fundamental earnings process. September 2009Thanks to Michelle Hanlon (the editor), Shiva Rajgopal, Terry Shevlin, Nemit Shroff, Richard Sloan, and Rodrigo Verdi for helpful comments. The framework for this review is based on Schrand's discussion of earnings quality at the April 2006 CARE Conference sponsored by the Center for Accounting Research at the University of Notre Dame. *Title Page/Author Identifier Page/Abstract 1 Understanding earnings quality: A review of the proxies, their determinants and their consequencesWe begin with a definition of "earnings quality" that sets the scope of our review. Higher quality earnings more faithfully represent the features of the firm's fundamental earnings process that are relevant to a specific decision made by a specific decision-maker. Our definition implies that the term "earnings quality" is meaningless without specifying the decision context, because the relevant features of the firm's fundamental earnings process differ across decisions and decision makers. Consistent with this broad definition, we review approximately 350 published papers on e...

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Section: Consequences Of Earnings Quality For Compensationmentioning

confidence: 99%

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Dechow¹,

2010

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“…Nwaeze, Yang, and Yin (2006) find that CFO is more important than earnings in managers' performance evaluation and the determination of their compensation and reward. One potential explanation for this is based on the assumption that CFO is different from earnings in that it is the reflection of the true cash inflow and outflow of a firm.…”

Section: Resultsmentioning

confidence: 96%

Dividend policy and cash flow manipulation: Evidence from China

Zhou

Zhao

2014

China Journal of Accounting Studies

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The China Securities Regulatory Commission (CSRC) issued a dividend policy in 2006 which set minimum payout levels for firms wishing to issue seasoned equity offerings. This paper investigates how listed Chinese firms may inflate reported cash flow from operations in order to reach the threshold set by the dividend policy. The results indicate a high level of cash flow manipulation among firms issuing seasoned equity offerings after 2006, the year when the dividend policy was implemented, suggesting that this manipulation is undertaken in response to the dividend policy. We further find that firms issuing seasoned equity offerings inflate cash flow upwards through working capital items and by including tax refunds in their cash flows statements after the implementation of the dividend policy. The manipulation of real cash flow activities by firms issuing seasoned equity offerings eventually damages the value of their firm.

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“…Graham et al's (2005) survey of 401 financial executives finds that 21.4% of chief financial officers rank cash flows and free cash flows as the most important performance measures, comparing to 51.6% who rank earnings as the most important. Nwaeze et al (2006) find that OCF is more important than earnings in managers' performance evaluation and the determination of their compensation and reward. Zhao (2004) argues that OCF is value relevant in the Chinese stock market.…”

Section: Introductionmentioning

confidence: 92%

Cash flow management in the Chinese stock market: An empirical assessment with comparison to the U.S. Market

Zhang

2009

Front. Bus. Res. China

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This paper examines cash flow management in the Chinese market and compares it to that in the U.S. market. It adopts Burgstahler and Dichev (1997) and Degeorge et al.'s (1999) method and the best-fitted distribution model to analyze the financial data of Chinese listed firms during 1998-2005 and the forecasted cash flow per share (CPS) data for Chinese firms in the I/B/E/S database during 1993-2005. Results reveal that cash flows reports are not as reliable as people think, and managers manipulate cash flows just as they manipulate earnings.Further analyses show that zero point, last year's cash flow and analyst cash flow forecast are the three thresholds that influence managers' decision when they report cash flow performance. Over 16% of the firms with small positive cash flows manipulate their cash flow. Moreover, 16.64% of the firms with small changes in cash flow and 9.81% of the firms with small surprises manipulate cash flows to reach the targets. A comparative analysis shows that cash flow management behaviors around zero and zero changes are more prevalent in the Chinese market than in the U.S. market. Cash flow management around analyst cash flow forecasts, however, is no more prevalent than that in the U.S. market.

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

Cited by 64 publications

References 78 publications

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Dividend policy and cash flow manipulation: Evidence from China

Cash flow management in the Chinese stock market: An empirical assessment with comparison to the U.S. Market

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