The Choice of Different Types of Subjectivity in CEO Annual Bonus Contracts

Felix Höppe; Frank Moers

doi:10.2308/accr-10132

The Choice of Different Types of Subjectivity in CEO Annual Bonus Contracts

The Accounting Review ◽

10.2308/accr-10132 ◽

2011 ◽

Vol 86 (6) ◽

pp. 2023-2046 ◽

Cited By ~ 62

Author(s):

Felix Höppe ◽

Frank Moers

Keyword(s):

Data Availability ◽

Ex Post ◽

Optimal Contracting ◽

Ex Ante ◽

Different Types ◽

The Board Of Directors ◽

Optimal Action ◽

Performance Dimensions ◽

Discretionary Bonuses ◽

Action Choice

ABSTRACT In assessing the performance of the CEO, subjectivity by the board of directors is often present in one form or another. We specifically focus on: (1) the ex ante option to ex post override a formula-based contract (“discretionary bonus”), and (2) the ex ante absence of any formula in a contract (“subjective weights”). We argue that the two types of deviations are driven by different contracting problems, which relate to whether post-contract information does or does not affect the agent's optimal action choice. We refer to these different contracting problems as problems of risk and problems of noncongruity, respectively, and hypothesize that discretionary bonuses are used for risk-reduction purposes, while subjective weights on different performance dimensions are used for congruity-improvement purposes. Our results are consistent with our expectations, showing that the use of the different types of subjectivity is consistent with optimal contracting considerations. Data Availability: All data are publicly available from the sources identified in the text.

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The Effects of Increased Book-Tax Difference Tax Return Disclosures on Firm Valuation and Behavior

Journal of the American Taxation Association ◽

10.2308/atax-10056 ◽

2011 ◽

Vol 33 (2) ◽

pp. 35-65 ◽

Cited By ~ 37

Author(s):

Michael P. Donohoe ◽

Gary A. McGill

Keyword(s):

Structural Break ◽

Substantial Reduction ◽

Tax Compliance ◽

Data Availability ◽

Market Participants ◽

Real Effects ◽

Ex Post ◽

Ex Ante ◽

Study Techniques ◽

And Behavior

ABSTRACT We use event study techniques to gauge market participants' ex ante perceptions regarding the benefits and burdens of the Schedule M-3, and structural break analysis to investigate whether managers make ex ante or ex post changes in book-tax differences as a result of this mandatory change in federal tax return disclosures. We find evidence suggesting investors believe ex ante the substantial increase in book-tax difference disclosures will increase future tax burdens and/or tax-compliance costs. Investors also appear to believe the M-3 may be more costly for firms having the types of book-tax differences that attract additional IRS scrutiny (e.g., discretionary permanent differences) and when such firms are weakly monitored. Further, we find evidence of a substantial reduction in our proxy for discretionary permanent book-tax differences prior and subsequent to the implementation of the M-3 and other regulatory events, suggesting both ex ante and ex post real effects on firm behavior. JEL Classifications: G14; H25; H26; M48. Data Availability: Data used in this study are available from public sources identified in the paper.

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Disclaiming the Future: Investigating the Impact of Cautionary Disclaimers on Investor Judgments Before and After Experiencing Economic Loss

The Accounting Review ◽

10.2308/accr-51924 ◽

2017 ◽

Vol 93 (4) ◽

pp. 81-99 ◽

Cited By ~ 14

Author(s):

H. Scott Asay ◽

Jeffrey Hales

Keyword(s):

Economic Loss ◽

Data Availability ◽

Safe Harbor ◽

Nonprofessional Investors ◽

Ex Post ◽

Investor Judgments ◽

Ex Ante ◽

Before And After ◽

The Impact ◽

Forward Looking

ABSTRACT We examine how cautionary disclaimers about forward-looking statements affect investor judgments both before making an investment and after having suffered an investment loss. In our first experiment, a cautionary disclaimer appears to effectively communicate to nonprofessional investors that forward-looking statements may not be reliable, but we find little evidence that the disclaimer alters the extent to which forward-looking statements influence nonprofessional investors' valuation judgments. In our second experiment, we shift our focus to ex post judgments and find that the disclaimer influences the extent to which investors feel wronged and entitled to compensation after an investment loss, consistent with investors attending to the disclaimer and acting as if it were, ex ante, effective. Notably, investors continue to feel more wronged and entitled to financial compensation when available evidence suggests that management knowingly issued false or misleading forward-looking statements—even if disclaimed. Together, these results provide support for recent judicial efforts to erode the sweeping safe harbor provisions currently granted to companies. Data Availability: Contact the authors.

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Measuring the effectiveness of bankruptcy institutions: filtering failures in Slovenian financial reorganizations

Journal of Institutional Economics ◽

10.1017/s1744137418000437 ◽

2019 ◽

Vol 15 (3) ◽

pp. 553-567 ◽

Cited By ~ 2

Author(s):

Jaka Cepec ◽

Peter Grajzl

Keyword(s):

Type I ◽

Type Ii ◽

Efficient Allocation ◽

Allocation Of Resources ◽

Type I Errors ◽

Ex Post ◽

Ex Ante ◽

Different Types ◽

Type Ii Errors ◽

Institutional Feature

AbstractWe examine the effectiveness of bankruptcy institutions at promoting socially efficient allocation of resources. Under the Slovenian simplified reorganization procedure, firms with rejected reorganization proposals are not automatically liquidated. This unique institutional feature facilitates an estimation of the extent of different types of filtering failures. Based on an ex-post conceptualization of firm viability, Type I errors (the acceptance of plans by non-viable firms) are more likely than Type II errors (the rejection of plans by viable firms) and the overall incidence of filtering failure is 27%. Based on an ex-ante conceptualization of firm viability, any given reduction in Type II errors would give rise to three times as many Type I errors. We contextualize our findings in the light of prior results in the literature, alternative mechanisms for insolvency resolution, and related bankruptcy reorganization schemes internationally where courts are awarded a comparatively more prominent role.

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The Joint Effects of Ex Ante Contractual Completeness and Ex Post Governance on Compliance in Franchised Marketing Channels

Journal of Marketing ◽

10.1509/jm.14.0089 ◽

2017 ◽

Vol 81 (3) ◽

pp. 130-153 ◽

Cited By ~ 29

Author(s):

Vishal Kashyap ◽

Brian R. Murtha

Keyword(s):

Negative Relationship ◽

Marketing Channels ◽

Important Distinction ◽

Joint Effects ◽

Multiple Data ◽

Ex Post ◽

Ex Ante ◽

Different Types ◽

Monitoring And Enforcement ◽

The Relationship

This study examines the heretofore neglected joint effects of ex ante contractual completeness and ex post governance on compliance in a franchise setting. In contrast to much of the extant literature that views contractual completeness in the aggregate, the present research disaggregates contractual completeness into ex ante monitoring and enforcement completeness, and additionally distinguishes between ex post monitoring and enforcement, allowing for a nuanced examination of the joint effects of different types of ex ante and ex post governance on compliance. Additionally, the authors advance the concept of consummate compliance, thereby complementing the literature, which tends to view compliance solely in terms of perfunctory compliance—an important distinction because the results suggest that perfunctory compliance has a negative relationship with customer satisfaction, whereas consummate compliance has a positive one. Drawing on multiple data sources, the authors demonstrate that ex ante monitoring completeness positively moderates the relationship between ex post monitoring and both types of compliance; however, ex ante enforcement completeness negatively moderates the relationship between ex post enforcement and both types of compliance.

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