Alignment between compensation-contracting and value-relevance roles of renenues /
Liu, Hanni
Alignment between compensation-contracting and value-relevance roles of renenues / Hanni Liu, Anup Srivastava, & Jennifer Yin - Lakewood Ranch, FL : American Accounting Association, 2023 - Vol 8(1) : pages 63-96
ABSTRACT : Revenue is the closest proxy in financial statement for market size and dominance, factors that determine the survival and future profits of modern corporations. Hence, revenue may contain value-relevant information, incremental to information contained in earnings. We find that revenue is used as a performance metric in executive compensation contracts when it provides information on equity valuation beyond the information provided by earnings. We call this occurrence an alignment between revenues contracting and the valuation roles. The alignment is higher for firms in newer industries, with investors who focus on revenue targets, with managers who provide revenue guidance, and with analysts who issue revenue forecasts. This alignment seems efficient because revenue is more informative of future profits when it carries higher weight in executive compensation contracts. We conclude that modern corporations increasingly incentivize managers to create new markets and defend existing market shares, in addition to maximizing current profits.
2380-2146
Revenue
Value relevance
Alignment between compensation-contracting and value-relevance roles of renenues / Hanni Liu, Anup Srivastava, & Jennifer Yin - Lakewood Ranch, FL : American Accounting Association, 2023 - Vol 8(1) : pages 63-96
ABSTRACT : Revenue is the closest proxy in financial statement for market size and dominance, factors that determine the survival and future profits of modern corporations. Hence, revenue may contain value-relevant information, incremental to information contained in earnings. We find that revenue is used as a performance metric in executive compensation contracts when it provides information on equity valuation beyond the information provided by earnings. We call this occurrence an alignment between revenues contracting and the valuation roles. The alignment is higher for firms in newer industries, with investors who focus on revenue targets, with managers who provide revenue guidance, and with analysts who issue revenue forecasts. This alignment seems efficient because revenue is more informative of future profits when it carries higher weight in executive compensation contracts. We conclude that modern corporations increasingly incentivize managers to create new markets and defend existing market shares, in addition to maximizing current profits.
2380-2146
Revenue
Value relevance