An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Yibin Zhou
University of Toronto

Abstract: This paper tests multitask agency theory in which the agent has multi-dimensional tasks and both an undistorted and a distorted performance measures are available for contracting. Accounting earnings is modeled as a distorted performance measure and stock returns as an undistorted measure. First, I demonstrate that the marginal products of CEOs’ earnings management actions with respect to accounting earnings, in general, are not equal to the marginal products with respect to stock returns. In doing so, I provide evidence in support of the hypothesis that accounting earnings is a distorted measure as a result of CEOs’ earnings management actions. Moreover, I find that the weight placed on accounting earnings, relative to stock returns, in CEO compensation decreases as earnings distortion increases, which is consistent with the predictions of multitask agency theory.

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