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Accounting Discretion, Horizon Problem, and CEO Retirement Benefits
Pavlo Kalyta,
University of Ottawa
ABSTRACT. Existing studies show that managers use accounting judgment to increase their compensation. On the other hand, the evidence on the impact of the horizon problem (i.e., the condition in which the anticipated tenure of the manager is shorter than the firm’s optimal investment horizon) on discretionary accounting choices is mixed and inconclusive. No research, however, takes into consideration that income increasing accounting choices in final pre-retirement years are particularly appealing to managers whose retirement benefits are contingent on firm’s performance. I investigate whether income increasing accruals are associated with the horizon problem when CEO’s supplemental executive retirement plan (SERP) benefits are performance-contingent. The result confirms the expectation: I find that discretionary accruals are higher in CEO’s final pre-retirement years only when CEO’s SERP benefits are contingent on firm's performance.
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