Operating Cash Flows and Earnings Target Revision: Evidence from Annual Cash Bonus Plans for CEOs

Laura Yue Li, Shuyang Wang, Wei Zhu

Research output: Contribution to journalArticlepeer-review

Abstract

We empirically examine the impact of operating cash flows on future earnings targets in CEOs’ annual cash bonus plans. Using target and actual compensation earnings-per-share disclosed in proxy statements of large U.S. public firms, we find operating cash flows have no significant incremental effects on the revision of future earnings targets in the presence of current earnings. We observe a positive association between future target achievability and current operating cash flows, indicating that firms with higher operating cash flows set significantly easier future earnings targets for CEOs. These findings suggest that the higher persistence of operating cash flows in predicting future earnings is not fully incorporated into target setting. Further analyses reveal that the positive association between future target achievability and current operating cash flows is attributable to both expectation bias and contractual considerations to reward CEOs who deliver greater cash flows and to limit activities that sacrifice cash flows.

Original languageEnglish (US)
Pages (from-to)181-199
Number of pages19
JournalJournal of Management Accounting Research
Volume34
Issue number2
Early online dateApr 9 2021
DOIs
StatePublished - Jun 1 2022
Externally publishedYes

Keywords

  • operating cash flows
  • target achievability
  • target revision
  • target setting

ASJC Scopus subject areas

  • Business and International Management
  • Accounting

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