The Use of Adjusted Earnings in Performance Evaluation

ArticleinSSRN Electronic Journal · January 2015with 32 Reads
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Abstract
We examine the use of adjusted earnings in CEO performance evaluation. We find that the majority of firms in the S&P 500 use adjusted earnings for performance evaluation, and that common exclusions such as interest, taxes, discontinued operations, and special items do not fully explain how firms calculate adjusted earnings. This suggests a widespread adoption of firm-specific adjustments to earnings for performance evaluation. Results of cross-sectional tests investigating the use of unadjusted earnings for performance evaluation are more consistent with the use of adjusted earnings improving incentive alignment between shareholders and managers than with managerial power over compensation.

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