Earnings patterns and CEO contractual outcomes

We investigate how earnings patterns could influence CEO compensation and CEO turnover. We find that the length of an earnings pattern has a curvilinear relation with CEO pay and retention. CEOs who report increasing (decreasing) earnings patterns receive incremental rewards (penalties), which decline as the earnings strings become longer. These upper and lower bounds of the rewards and penalties for the CEOs align with the market valuation of earnings patterns and reflect a tradeoff between inducing productive effort and diminishing managerial entrenchment as these patterns evolve. Additional evidence suggests that the relationship between earnings patterns and CEO compensation is largely driven by firms with strong corporate governance, high earnings persistence, and low market competition. The findings are not attributable to different measures of accounting quality and growth identified in prior research. Our results suggest that earnings patterns play a distinct role in their use for CEO contracts.