Two Essays on Executive Compensation

The first essay examines the motives behind why CEOs manipulate earnings and quantifies the gains accruing from each motive. Prior literature has identified that CEO manipulate earnings for personal gain; in this I estimate the direct and indirect monetary gains. I further explore whether statutory provisions that require recoupment of incentive compensation following a restatement ("clawback" provisions) are likely to deter executives from manipulating earnings. My results show that while the Dodd-Frank Clawback can potentially recover a large portion of the direct gains from misreporting (i.e. "excess incentive compensation"), there are significantly larger indirect gains (i.e. profits from the sale of securities and termination avoidance) which are not subject to clawback under Dodd-Frank. These results suggest existing clawback legislation may not be sufficient strong enough to curb earnings manipulations. The second essay examines deferred compensation in light of the optimal contracting vs. managerial power theories. I present and test several hypotheses to determine whether deferred compensation serves to align managerial interests with the firm (i.e., the "Optimal Contracting" hypothesis) or is evidence of agency problems (i.e. the "Managerial Power" hypothesis). My results support the managerial power hypothesis. Firms use deferred compensation as a means to obscure total compensation, particularly in periods of high attention on executive compensation. Additionally, the results indicate that firms increase deferred compensation to (partially) offset extreme pay cuts in current compensation. I do not find a positive relationship between firm performance and deferred compensation. Rather, executives are rewarded with deferred compensation regardless of firm performance.