گردش مالی مدیر عامل و ویژگی های اطلاعات حسابداری

Multiple-performance-measure agency models predict that optimal contracts should place greater reliance on performance measures that are more precise and more sensitive to the agent's effort. We apply these predictions to CEO retention decisions. First, we develop an agency model to motivate proxies for signal and noise in firm-level performance measures. We then document that accounting information appears to receive greater weight in turnover decisions when accounting-based measures are more precise and more sensitive. We also present evidence suggesting that market-based performance measures receive less weight in turnover decisions when accounting-based measures are more sensitive or market returns are more variable.

One of the primary contributions of agency theory has been to identify what properties make for a good measure of an agent's performance. Multiple-performance-measure agency models such as Banker and Datar (1989) and Holmstrom and Milgrom (1991) indicate that use of performance measures that are relatively more precise and more sensitive to the agent's effort can help mitigate agency costs. This research has spawned a growing empirical literature attempting to assess whether firms’ corporate governance practices conform to these predictions. Lambert and Larcker (1987) and Bushman et al. (1996), for example, focus on boards’ choices over annual compensation grants, and show that contracts substitute toward market- and accounting-based measures when such measures are better indicators of managerial performance. Other research addresses general governance structures and policies. For example, Bushman et al. (2004) document that the structure of incentives provided to firms’ boards of directors and the extent of ownership concentration vary in systematic ways with properties of managerial performance measures. Our objective in this paper is to study how the relation between various performance measures and CEO turnover is affected by properties of the firm's accounting system. Specifically, we examine cross-sectional variation in the weights placed on accounting and market return information in CEO turnover decisions, and relate this to properties of these performance measures. Many studies (beginning with Coughlan and Schmidt, 1985; Warner et al., 1988; Weisbach, 1988) have analyzed CEO turnover, and the development of this literature largely parallels that on CEO compensation. To date, however, fewer studies have attempted to explain across-firm variation in the association of accounting- and market-based performance measures with executives’ continued employment. One exception is Defond and Park (1999), which shows that industry-adjusted earnings factor more strongly into turnover decisions for firms in less concentrated industries.1 While boards’ compensation decisions have received considerable attention in academic literature on the use of performance measures, we offer three reasons why CEO turnover decisions might yield greater insights into how information is used in corporate board rooms. First, it is well documented (see Hall and Liebman, 1998; Murphy, 2000a) that most firm-related variation in top executive wealth stems from changes in the value of executives’ stock and option holdings. This raises the question of the extent to which annual compensation decisions have significant effects on executives’ actions, and thus significant effects on firm value.2 However, while boards may (at least partially) delegate compensation decisions to capital markets through the use of equity-based instruments, boards cannot delegate authority over continued employment of CEOs. In considering retention decisions, directors may of course make use of market- and accounting-based performance measures, but the directors themselves must make the decision about retaining the CEO. Second, prior research (see Weisbach, 1988; Murphy and Zimmerman, 1993) provides ample evidence that earnings are a significant predictor of CEO turnover. Hermalin and Weisbach (1998) offer a possible explanation for this fact by pointing out that share prices reflect the market's expectations regarding the CEO's continued employment. This effect partially confounds the link between market returns and CEO turnover, meaning boards may have to rely more heavily on accounting-based measures in making CEO retention decisions. Given this, it is important to gain an understanding of the properties that affect accounting information's usefulness in such decisions. Third, boards’ turnover decisions likely reflect a broader set of concerns than compensation decisions. While turnover can be used as an incentive mechanism, matching considerations likely figure prominently as well. As Baker et al. (1988) note, incentives are determined by the slope of the relation between pay and performance; thus, if the likelihood of termination is higher when performance is worse, then the threat of firing can provide incentives. However, CEO turnover can also be driven by the board's conclusion that the CEO's ability is low, or that the CEO's skills are not well matched to the firm's needs. If turnover decisions primarily reflect incentive considerations, then the board uses firm-level performance measures to make inferences regarding the CEO's effort. If, on the other hand, turnover decisions reflect ability or matching considerations, then the board uses firm-level measures to make inferences regarding ability or the suitability of the match. These two cases each suggest a similar pattern in the association between properties of firm performance measures and CEO turnover. In this paper, we examine how the weights on accounting- and market-based performance measures in CEO turnover decisions are related to their properties as measures of managerial performance. In particular, we expect that when accounting is more informative about managerial performance, boards of directors should rely more heavily on accounting returns in making decisions about continuation of CEO employment. Hence, turnover probability should rise faster with reductions in accounting returns in firms where accounting information is a better measure of managerial performance. We also consider how the weight on market-based measures is affected by the properties of both accounting- and market-based measures. To test these predictions, we devise measures of the signal and noise contained in accounting- and market-based measures of managerial performance. Following prior work (see, for example, Lambert and Larcker, 1987; Bushman et al., 1996), we capture “noise” by computing the historical variance of accounting- and market-based measures of performance. To devise a measure of signal in accounting-based measures, we apply recent research by Ball et al. (2000) and Bushman et al. (2004), among others, in devising a measure of earnings “timeliness.” This measure is intended to reflect the extent to which current earnings capture current value-relevant information. The underlying intuition for the use of this measure is that the more timely earnings are in capturing value-relevant information, the greater weight investors and directors place on them in assessing how and why equity values are changing. In an appendix, we analyze a simple principal/agent model and develop conditions under which the weight on earnings in an agency relationship increases with earnings timeliness. To measure timeliness, we rely on measures of the association between earnings and contemporaneous stock returns.3 Our model shows that the association between earnings and returns is increasing in timeliness, but is also affected by the variances of the accounting- and market-based measures. Hence, by holding these variances fixed, we can use this association as a measure of earnings timeliness. We control for these variances in several ways, as we discuss below. We use our signal and noise proxies to examine variation in the extent to which these measures play a role in CEO retention decisions for a sample of 1,293 CEO turnover events identified using Forbes annual executive compensation surveys between 1975 and 2000. Taking the standard logit regression of CEO turnover on firm performance as a starting point, we interact accounting- and market-based measures of firm performance with our signal and noise proxies. We find support for the notion that our noise and timeliness measures affect the weight on earnings information in turnover decisions. Our results suggest that, ceteris paribus, the weight on earnings information is increasing in earnings timeliness and decreasing in the variance of earnings. Our estimates of these effects are statistically significant at between the 1% and 5% levels. We also test a prediction from our model that firms rely less heavily on market-based measures when accounting information is more timely or when market returns are noisier. Our results here depend on the sample we analyze. Using a sample of CEO turnovers that press accounts characterize as “forced departures,” we find the weight placed on market returns in turnover decisions is decreasing in earnings timeliness and in the variance of returns. Using a broader sample of all CEO turnovers (which presumably includes many cases where CEOs simply retire), we do not find support for this hypothesis.4 Finally, we incorporate the results of Defond and Park's (1999) analysis into our tests. They find that measures of industry concentration can explain across-firm variation in the use of industry-adjusted accounting measures in turnover decisions. Given that both their study and ours address variation in the weight on accounting information in turnover, we are interested in examining the relation between the two sets of findings. It is possible, for example, that industry concentration is the key driver of both sets of findings, and that our proxies for signal and noise in earnings information are simply reflecting this fact. To examine links between the analyses, we construct measures of industry concentration and interact them with firm performance measures in our CEO turnover regressions. We find that both properties of accounting information and industry concentration help explain cross-sectional variation in the use of accounting-based performance measures in CEO turnover, and including concentration measures does little to alter our main findings. The remainder of the paper proceeds as follows: In Section 2, we develop our proxies for signal and noise and provide intuition for our model. In Section 3, we describe our data and sample selection procedures. In Section 4, we describe our analysis and present results. Concluding comments are contained in Section 5. The model appears in the appendix.

Our objective in this paper is to examine how the weights on accounting- and market-based performance measures in CEO turnover decisions are related to their properties as measures of managerial performance. Multiple-performance-measure agency theory suggests that factors associated with the signal-to-noise ratio of performance measures should influence their weights in evaluating and rewarding manager performance. We present such a model in the appendix, and use it to develop conditions under which a higher association between earnings and returns implies a greater weight on earnings in managerial incentive arrangements. While this association has been used in much prior work on properties of earnings as a managerial performance measure, there appears to be no consensus in the existing literature as to how this association should be related to the weight on earnings. Some authors (e.g., Bushman et al., 1996) use the correlation as a measure of the strength of signal contained in accounting information, while others (e.g., Lambert and Larcker, 1987; Ittner et al., 1997) propose the opposite relation, arguing that earnings that are not informative about firm value can still provide valuable information for evaluating the CEO. Our model incorporates both viewpoints and offers conditions under which each holds. We show that reductions in the earnings/return association make earnings less useful as a performance measure if the reduced association is driven by a decrease in the fraction of current value creation that appears in current earnings. The converse is true if the reduction is driven by increased variation in returns that is unrelated to current value creation. We apply this reasoning in our empirical analysis. We capture the earnings/return association with a measure of earnings timeliness derived from prior research by Ball et al. (2000) and Bushman et al. (2004). We proxy for noise using measures of earnings and return variance. We hypothesize that directors will place greater reliance on earnings numbers when earnings timeliness is high or when earnings are less noisy. Similarly, we predict that directors will rely more heavily on information in stock returns when earnings timeliness is low or when stock returns are less variable. We test these hypotheses using data on CEO turnover derived from the Forbes executive compensation surveys and find support for many of our hypotheses. Using our proxies for signal and noise, we find support for the hypothesis that these properties impact the relation between earnings and turnover probabilities. Our results suggest that the weight on earnings information is increasing in timeliness and decreasing in earnings variance. We find mixed support for the hypothesis that firms rely more heavily on market-based measures when accounting information is less timely or market returns are less variable. Using the sample of turnovers we identified as forced, we find the weight placed on market returns in turnover decisions is decreasing in timeliness and decreasing in the variance of returns. These findings do not hold in our broader sample of all CEO turnovers. We also document the robustness of our results to the inclusion of industry concentration measures. We relate our analysis to Defond and Park's (1999) argument that the use of industry-adjusted performance information in turnover decisions is positively impacted by lower levels of industry concentration.