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Wiley InterScience | ||||||
  Journal of Accounting ResearchVolume 44 Issue 1, Pages 53 - 83 Published Online: 5 Jan 2006 © 2010 The Accounting Research Center at the University of Chicago Booth School of Business.
Abstract | References | Full Text: PDF (Size: 308K) | Related Articles | Citation Tracking  An Analysis of the Relation between the Stewardship and Valuation Roles of Earnings The authors thank Jeff Abarbanell, Qi Chen, Thomas Hemmer, Raffi Indjejikian, Eddie Lazear, Richard Leftwich (the editor), Kevin J. Murphy, Jim Ohlson, Mark Ubelhart, and seminar participants at the University of Chicago, Duke/UNC Fall Camp, Harvard Business School, Indiana University, London School of Economics, University of Michigan, AAA Annual Meetings, and WorldatWork Academic Research Conference for useful comments. We are particularly grateful to three anonymous referees for their useful comments. We appreciate the research assistance of Xia Chen and Jennifer Milliron, and thank Kevin J. Murphy for providing data from Forbes Compensation Surveys. We also thank the Graduate School of Business at the University of Chicago and UNC Kenan-Flagler Business School for financial support. Engel also acknowledges research support from the FMC Faculty Research Fund at the University of Chicago Graduate School of Business. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2006 ABSTRACT
In this paper, we seek a deeper understanding of how accounting information is used for valuation and incentive contracting purposes. We explore linkages between weights on earnings in compensation contracts and in stock price formation. A distinction between the valuation and incentive contracting roles of earnings in Paul [1992] produces the null hypothesis that valuation earnings coefficients (VECs) and compensation earnings coefficients (CECs) are unrelated. Our empirical analyses of the relations between earnings and both stock prices and executive compensation data at the firm and industry levels over the period 1971–2000 rejects Paul's [1992] hypothesis of no relation. We also document an increasing weight over time on other public performance information captured by stock returns in the determination of cash compensation. Specifically, we find that the incentive coefficient on returns is significantly higher in the second of two equal sample subperiods relative to the incentive coefficient on earnings. Received 14 May 2003; accepted 19 September 2005 | 
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