The dilemma between ethics and reputation: evidence of earnings management following CEO pay cuts for women

ABSTRACT

Lobo, Manchiraju, and Sridharan (2018) find that CEOs manipulate discretionary accruals to mitigate damage to their reputation after they experience substantial pay cuts. Extending their study, we examine whether the gender of CEOs alleviates this problem following a drastic compensation reduction. Our sample is composed of 4,130 firm-year observations. We find that female CEOs, who are generally viewed to be more ethical and risk-averse than males, engage in less earnings management following extreme pay cuts as compared to their male counterparts. Our results provide implications for market participants and governance boards related to assessing the use of compensation tools.

KEYWORDS:

• Extreme ceo pay cuts
• executive
• CEO gender
• earnings management

JEL CLASSIFICATION:

• J16
• L25
• M12
• M52

Acknowledgments

We appreciate the comments made by the discussant and participants from the NCKU Accounting Practice and Development Forum held in October 2020.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Based on Gao, Harford, and Li (2012) and Lobo, Manchiraju, and Sridharan (2018), PAYCUT equals 1 if (a) the CEO has served at least two years prior (year −2), and one year subsequent (year + 1) to the pay-cut year (year 0); (b) his or her total pay in year 0 is no more than 75% of the pay in year −1, and (c) his or her total pay in year −1 is no more than 125% of his pay in year −2, and 0 otherwise.

² FCEO equals one if the CEO is a female, and zero otherwise.

Additional information

Funding

This research is supported in part by ‘Higher Education SPROUT Project’ and ‘Center for Innovative FinTech Business Models’, Ministry of Education to the Headquarters of University Advancement at National Cheng Kung University (NCKU).