Melbourne Accounting Research Seminar - Professor Shane Dikolli

Professor Shane Dikolli from Duke University presented a MARS seminar

Topic: CFO co-option, earnings targets, and CEO compensation

Abstract: We study whether power dynamics in the CEO-CFO relationship influence the CEO’s compensation. To operationalize CEO-CFO power dynamics, we define CFO co-option as the appointment of a CFO after a CEO assumes office. We find that CFO co-option is associated with a CEO pay premium of about 5.5%, which is partially explained by a higher likelihood that the firm achieves analyst based earnings targets. Our evidence also indicates that the primary mechanism through which co-opted CFOs achieve earnings targets is by walking down analyst forecasts over a fiscal year rather than using discretionary accruals to inflate earnings. The evidence thus suggests that co-opted CFOs are more likely to manage expectations about earnings rather than manage earnings directly to achieve earnings targets.