Fair Value Gains and Losses in Derivatives and CEO Compensation

Manchiraju, Hariom; Hamlen, Susan S.; Kross, William; Suk, Inho

doi:10.2139/ssrn.1894569

Cited by 7 publications

(13 citation statements)

References 29 publications

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“…Larger values of VIX indicate higher market volatility. Like prior studies (e.g., Manchiraju, Hamlen, Kross, & Suk, and Manchiraju, Pierce, & Sridharan, ), we measured hedge ineffectiveness (HG_INE) as the ratio of derivative gains or losses due to hedging ineffectiveness to total assets.…”

Section: Methodsmentioning

confidence: 99%

SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility

Tessema

Deumes

2017

Financ Manag Account

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This study investigates whether the Statement of Financial Accounting Standard No. 133 (SFAS 133) influences firms' income smoothing via discretionary accruals decisions. Moreover, we investigate whether the level of hedge effectiveness and market volatility affects the impact of SFAS 133 on firms' income smoothing via discretionary accruals decisions. Consistent with our predictions, we find a significant increase in income smoothing via discretionary accruals activity after the adoption of SFAS 133. We also find that income smoothing via discretionary accruals after the adoption of SFAS 133 increases with the level of hedge ineffectiveness. By contrast, we find that perfect hedgers do not engage in more income smoothing via discretionary accruals after the adoption of SFAS 133. Finally, we find that the higher the market volatility is the larger the income smoothing is via discretionary accruals after the adoption of SFAS 133. This implies that higher market volatility makes it more difficult for firms to meet hedge accounting requirements, thereby increasing unmanaged earnings volatility and income smoothing. Prior studies suggest that regulators are expressing concern about the effect of earnings management on the quality of reported earnings and the functioning of capital markets (e.g., Barton, 2001). In this ---

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Section: Methodsmentioning

confidence: 99%

SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility

Tessema

Deumes

2017

Financ Manag Account

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“…For example, Burgstahler and Dichev (1997) and Ahmed et al (1999) document that earnings management is used as a method for firms to signal the good quality of their business to financial statements users. The effect of reporting choices on compensation has also been the focus of many studies, such as Healy (1985) and Healy and Wahlen (1999), and more recently, the relationship between compensation and fair value estimates (Manchiraju et al , 2016). Other indirect incentives for managers to smooth earnings include costs associated with risk aversion, breach of debt covenants and tax payments (Moyer, 1990; Scholes et al , 1990; Collins et al , 1995; Beatty et al , 1995; Dechow et al , 2010).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…The implicit rationale for why managers choose these strategies is the effect on their own compensation. A more explicit linking of fair value estimates to compensation is provided in the study of Manchiraju et al (2016). Many of these studies further assume that managers’ acting to maximize compensation has negative consequences for investors[2].…”

Section: Introductionmentioning

confidence: 99%

Fair value accounting, earnings management, and the case of bargain purchase gain

Lilien

Sarath²,

Yan

2019

ARA

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Purpose The purpose of this paper is to investigate the association between bargain purchase gains (BPGs) booked by the acquirer and smoothing of acquirers’ earning performance across time. Design/methodology/approach The authors use a sample of 122 bargain purchase acquisitions in non-financial industries from 2009 to 2012 and a pair-match control group of 122 goodwill acquisitions. Findings The authors find that BPGs, and in particular, the Level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns. Originality/value This study is the first one to investigate bargain purchase acquisitions in a broad range of non-financial industries and suggests that managers are using the valuation of intangibles to avoid unfavorable earnings even though these valuations are not credible to investors.

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“…The article shows that the new standard reduced idiosyncratic stock volatility suggesting that the model-based estimates provided better information to investors than the original historical cost approach. Manchiraju, Hamlen, Kross, and Suk (2016) provide at least a partially contradictory viewpoint by showing that at least in the Oil and Gas industry, CEO compensation increased from profits generated both by effective hedges and speculative hedges. They infer that compensation committees are unable to—fully—grasp the nature of these instruments although this failure is mitigated if there is an accounting expert on the compensation committee.…”

Section: Research On Fair Value: What Do We Know?mentioning

confidence: 99%

The Pros and Cons of Fair Value Accounting in a Globalized Economy

Marra

2016

Journal of Accounting, Auditing & Finance

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Fair Value Accounting is not a new concept, either in business decisions or in financial reporting. Nonetheless, due to big changes that took place over the last 20 to 30 years in the worldwide economy and the influence of the 2007 financial crisis, it has reemerged as one of the “hottest topics” on the agenda of Accounting Standards setters both under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standard (IFRS). Current research seems well balanced across the pros and cons of fair value, lending ammunition both to those “in favor” and to the “opponents” of fair value accounting. Subjectivity, estimates, and managerial discretion permeate the concept, definition, and measurements of fair value, leaving such measurements open to an aggressive use of judgment and estimates. However, fair value accounting is more closely related to the needs of a globalized and information-based economy and is likely to grow in importance and use in the future. This article discusses evidence and summarizes some current papers on the informational impact of fair value measurements on market participants.

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Fair Value Gains and Losses in Derivatives and CEO Compensation

Cited by 7 publications

References 29 publications

SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility

SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility

Fair value accounting, earnings management, and the case of bargain purchase gain

The Pros and Cons of Fair Value Accounting in a Globalized Economy

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