Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits

Accounting rules for valuing retained interest from securitizations require management to make assumptions concerning discount rates, default rates, and prepayment rates. These assumptions provide management with discretion to determine the “gain on sale” of the receivables. We investigate whether C...

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Bibliographic Details
Published in:Journal of accounting & economics 2010-02, Vol.49 (1), p.2-25
Main Authors: Dechow, Patricia M., Myers, Linda A., Shakespeare, Catherine
Format: Article
Language:English
Subjects:
Accounting
Accounting procedures
Business management
Chief executive officers
Compensation
Earnings
Earnings management
Executive compensation
Fair value
Governance
Monitoring
Securitization
Securitizations
Securitizations Fair value Earnings management Compensation Governance
Studies
Valuation
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Summary:Accounting rules for valuing retained interest from securitizations require management to make assumptions concerning discount rates, default rates, and prepayment rates. These assumptions provide management with discretion to determine the “gain on sale” of the receivables. We investigate whether CEO compensation is less sensitive to securitization gains than to other earnings components in the presence of proxies for how independent (outsiders, females, fewer CEO-selected directors) and informed (financial expertise) directors are. Overall, our results do not suggest that better “monitoring” reduces earnings management or CEO pay-sensitivity to reported securitization gains. Our results suggest that CEOs are rewarded for the gains they report and boards do not intervene.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2009.09.006