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The Shielding of CEO Compensation from the Effects of Strategic Expenditures

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  • Augustine Duru
  • Raghavan J. Iyengar
  • Alex Thevaranjan

Abstract

This study investigates whether and why compensation committees shield CEO compensation from income†decreasing effects of strategic expenditures. We document that firms do shield recurring strategic expenditures such as research and development and advertising expenditures. We also find that firms shield research and development expenditures more than advertising expenditures. Our results are consistent with prior findings that suggest that compensation committees shield CEOs from nonroutine transactions such as restructuring charges and extraordinary losses. Using a two†task principal†agent framework, we show that such shielding improves the efficiency of the contract by making the shielded income measure more congruent with the principal's objectives.

Suggested Citation

  • Augustine Duru & Raghavan J. Iyengar & Alex Thevaranjan, 2002. "The Shielding of CEO Compensation from the Effects of Strategic Expenditures," Contemporary Accounting Research, John Wiley & Sons, vol. 19(2), pages 175-193, June.
    • Handle: RePEc:wly:coacre:v:19:y:2002:i:2:p:175-193
    DOI: 10.1506/UM8Q-NVJ6-JKGT-GH5W
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    References listed on IDEAS

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    Cited by:

    1. Christiane Pott & Tobias Tebben & Christoph Watrin, 2014. "The effect of outside directors’ and auditors’ incentives on managers’ ability to manage cash bonuses," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(2), pages 505-540, May.
    2. Ferreira, Daniel & Athanasakou, Vasiliki & Goh, Lisa, 2017. "Changes in CEO Stock Option Grants: A Look at the Numbers," CEPR Discussion Papers 12318, C.E.P.R. Discussion Papers.
    3. Tsao, Shou-Min & Lin, Che-Hung & Chen, Vincent Y.S., 2015. "Family ownership as a moderator between R&D investments and CEO compensation," Journal of Business Research, Elsevier, vol. 68(3), pages 599-606.
    4. Raghavan J. Iyengar & Ernest M. Zampelli, 2010. "Does accounting conservatism pay?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(1), pages 121-142, March.
    5. Wenxia Ge & Jeong‐Bon Kim, 2020. "How does the executive pay gap influence audit fees? The roles of R&D investment and institutional ownership," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 677-707, May.
    6. Raghavan J. Iyengar & Ernest M. Zampelli, 2008. "Auditor independence, executive pay and firm performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(2), pages 259-278, June.
    7. Bum†Jin Park, 2017. "Auditors’ Economic Incentives and the Sensitivity of Managerial Pay to Accounting Performance," Australian Accounting Review, CPA Australia, vol. 27(4), pages 382-399, December.
    8. Wei Zhang & Steven F. Cahan & Arthur C. Allen, 2005. "Insider Trading and Pay-Performance Sensitivity: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1887-1919.
    9. Jian Cao & Indrarini Laksmana, 2010. "The effect of capital market pressures on the association between R&D spending and CEO option compensation," Review of Quantitative Finance and Accounting, Springer, vol. 34(2), pages 273-300, February.
    10. Saito, Yoshie, 2019. "Are long-tenured CEOs rent seekers? Analysis of cash compensation and post disposal performance," Advances in accounting, Elsevier, vol. 44(C), pages 95-107.
    11. Kroos, P., 2009. "The incentive effects of performance measures and target setting," Other publications TiSEM 944001f9-198b-4b81-8824-3, Tilburg University, School of Economics and Management.
    12. Caylor, Marcus L. & Lopez, Thomas J., 2013. "Cost behavior and executive bonus compensation," Advances in accounting, Elsevier, vol. 29(2), pages 232-242.
    13. Kevin H. Kim & Derek K. Oler & Juan Manuel Sanchez, 2021. "Examining the stock performance of acquirers where the acquirer or target hold patents," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 185-217, January.

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