The Effect of Profit Sensitivity Dimensions (Earnings Response Coefficient, Returns Abnormal Fluctuations and Earning Prediction Error) on Board of Director’s Compensation

Document Type : Research Paper

Authors

1 Assistant Prof. in Accounting, Shahid Chamran University of Ahvaz, Ahvaz, Iran

2 Assistant Prof in Economics and Applied Econometrics, Shahid Chamran University of Ahvaz, Ahvaz, Iran

3 PhD. in Accounting, Hashtrood Branch, Islamic Azad University, Hashtrood, Iran

Abstract

To create interests alignment between the owner and the manager, accurate index of performance should be usedas the rewarding criterion. One of the important indexes for performance measurement purposes in rewarding plans is the profit sensitivity, so that it can meet all of contract parties’ interests. Those profits carrying sensitivity cancause a change in the value of the company's market. So, the main purpose of this study is to survey the effect of profit sensitivity dimensions (Earnings response coefficient, abnormal returns fluctuations and earning prediction error)on board of directors’ reward. For this purpose, the data related to the Tehran Stock Exchange listed companies (121 companies) for the period from 2008 to 2016 were extracted and the multiple regression was used to test the hypothesis. The results showed that three criteria, namely, earnings response coefficient, adjusted earnings response coefficient and earnings value relevance, have a positive effect on board of director’s rewards, while two criteria, namely, abnormal returns fluctuations and earning prediction error have a negative effect on board of director’s rewards.

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References

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Financial Research Journal
Volume 19, Issue 4
2017
Pages 615-642

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