Corporate Governance and Financial Reporting Research

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Corporate Governance and Financial Reporting Research Discussion of “The explanatory power of earnings levels vs. earnings changes in the context of executive compensation” by Barber et al. (1999) TAR

Purpose of the Paper To examine the relation between earnings levels vs. earnings changes and executive compensation.

Motivation & Contribution I. Motivation: Earnings levels or changes employed in prior studies is a poor proxy in determining executive compensation (because earnings levels or changes contain transitory components). Earnings persistence should be considered (because earnings persistence contain permanent components). II. Contribution: this study indicated earnings persistence is a major factor in determining executive compensation .

Sample Data and Method I. Sample Data: 712 U.S. public firms II. Both analytical model and non-linear regression model are used: Compensation = controls + β1*earnings level*persistent + β2*earnings changes*persistent + β3*earnings level*persistent2 + β2*earnings changes*persistent2

Results/Conclusion I. Table 2: t-stats of these PERSISTs are higher (more significant) II. The model considering for earnings persistence can be applied in practice to evaluate executive performance.

Extension Future studies of: I. Governance Influence; II. Fair value accounting matters; III. Local Applications