The effect of pay disparities within top management on conservative reporting

Gad, M., Nguyen, T. and Scapin, M. (2023) The effect of pay disparities within top management on conservative reporting. Accounting and Business Research, 53(4), pp. 478-504. (doi: 10.1080/00014788.2022.2056119)

Abstract

We study the effect of the pay gap between the chief executive officer (CEO) and the next layer of executives in the top management team (TMT)—a proxy for promotion-based tournament incentives—on conditional conservatism in financial reporting. We find that higher levels of tournament incentives are associated with less conservative financial reports. Our results hold in an instrumental variable (IV) analysis and regressions using alternative measures of both pay gap and accounting conservatism. Furthermore, we find that senior executives’ engagement in tournaments for promotion is affected by their perceived probability of success. Specifically, the negative relationship between the pay gap and conservatism is stronger (weaker) when the CEO is more (less) likely to be replaced. Overall, our results indicate that pay disparities within the TMT play an important role in financial reporting.

• Item Type: Articles
• Additional Information: Funding: This work was supported by University of Bristol, School of Accounting and Finance: General Research Funds; University of Bristol, International Research Partnerships: Benjamin Meaker program.
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Nguyen, Dr Trang
• Authors: Gad, M., Nguyen, T., and Scapin, M.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Accounting and Business Research
• Publisher: Taylor and Francis
• ISSN: 0001-4788
• ISSN (Online): 2159-4260
• Published Online: 27 May 2022
• Copyright Holders: Copyright © 2022 The Authors
• First Published: First published in Accounting and Business Research 53(4): 478-504
• Publisher Policy: Reproduced under a Creative Commons licence