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Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits

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Author Info

  • Dechow, Patricia M.
  • Myers, Linda A.
  • Shakespeare, Catherine

Abstract

Accounting rules for valuing retained interest from securitizations require management to make assumptions concerning discount rates, default rates, and prepayment rates. These assumptions provide management with discretion to determine the "gain on sale" of the receivables. We investigate whether CEO compensation is less sensitive to securitization gains than to other earnings components in the presence of proxies for how independent (outsiders, females, fewer CEO-selected directors) and informed (financial expertise) directors are. Overall, our results do not suggest that better "monitoring" reduces earnings management or CEO pay-sensitivity to reported securitization gains. Our results suggest that CEOs are rewarded for the gains they report and boards do not intervene.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 49 (2010)
Issue (Month): 1-2 (February)
Pages: 2-25

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Handle: RePEc:eee:jaecon:v:49:y:2010:i:1-2:p:2-25

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Web page: http://www.elsevier.com/locate/jae

Related research

Keywords: Securitizations Fair value Earnings management Compensation Governance;

References

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  10. Anil Shivdasani & David Yermack, 1998. "CEO Involvement in the Selection of New Board Members: An Empirical Analysis," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-059, New York University, Leonard N. Stern School of Business-.
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Citations

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Cited by:
  1. Livne, Gilad & Markarian, Garen & Mironov, Maxim, 2013. "Investment horizon, risk, and compensation in the banking industry," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3669-3680.
  2. Stergios Leventis & Panagiotis Dimitropoulos, 2012. "The role of corporate governance in earnings management: experience from US banks," Journal of Applied Accounting Research, Emerald Group Publishing, vol. 13(2), pages 161-177.
  3. Kuo, Jing-Ming & Ning, Lutao & Song, Xiaoqi, 2014. "The Real and Accrual-based Earnings Management Behaviors: Evidence from the Split Share Structure Reform in China," The International Journal of Accounting, Elsevier, vol. 49(1), pages 101-136.
  4. Fabrizi, M. & Parbonetti, A., 2013. "Privatized Returns and Socialized Risks: CEO Incentives, Securitization Accounting and the Financial Crisis," CITYPERC Working Paper Series 2013-08, Department of International Politics, City University London.
  5. Livne, Gilad & Markarian, Garen & Milne, Alistair, 2011. "Bankers' compensation and fair value accounting," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1096-1115, September.
  6. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
  7. Gary Gorton & Andrew Metrick, 2012. "Securitization," NBER Working Papers 18611, National Bureau of Economic Research, Inc.
  8. Antonio Parbonetti & Andrea Menini & Michel Magnan, 2011. "Fair Value Accounting: Information or Confusion for Financial Markets?," CIRANO Working Papers 2011s-56, CIRANO.
  9. Franke, Günter & Krahnen, Jan Pieter, 2008. "The future of securitization," CFS Working Paper Series 2008/31, Center for Financial Studies (CFS).
  10. Krzysztof Jackowicz, 2010. "About motives behind Securitization and its Implications: An Overview of Empirical Findings," Contemporary Economics, University of Finance and Management in Warsaw, vol. 4(1), March.
  11. Mary E. Barth & Javier Gomez-Biscarri & Ron Kasznik & Germán López-Espinosa, 2012. "Fair Value Accounting, Earnings Management and the use of Available-for-Sale Instruments by Bank Managers," Faculty Working Papers 05/12, School of Economics and Business Administration, University of Navarra.
  12. Gao, Pingyang, 2013. "A measurement approach to conservatism and earnings management," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 251-268.
  13. Barth, Mary & Taylor, Daniel, 2010. "In defense of fair value: Weighing the evidence on earnings management and asset securitizations," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 26-33, February.
  14. Dan Dacian Cuzdriorean, 2013. "Most Recent Findings In Earnings Management Area: Interesting Insights From Traditionally Top 5 Leading Accounting Journals," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 5.

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